November 1, 2017 | What happened in October? In a month dominated by political news and anticipated legislative changes, U.S. Read More
President & CEO Dan Kraninger reflects on the second quarter of 2017 and provides insights moving forward.
In the U.S., we have a savings/retirement concern. The population is aging, Social Security’s trust funds are expected to be depleted by 2034, and the median retirement savings of a household headed by someone aged 55 to 64 is a little over $100,000. But does that mean large numbers of Americans are facing a retirement crisis? Will they suffer a substantial drop in their standard of living in later life?
These questions are rather dramatic and even experts, it turns out, are sharply divided on the answers. Shai Akabas, director of fiscal policy for the Bipartisan Policy Center, a Washington, D.C.-based think tank, convened 19 experts to recommend ways to improve the nation’s retirement security and no big surprise, that group ultimately agreed to disagree that a crisis even existed. Some favored a view that retirees will do just fine and others predicted dramatic shortfalls (good time to insert an economist joke — here’s one of my favorites, Q: How many economists does it take to change a light bulb? A: Seven, plus or minus ten).
If I were invited to that forum in Washington, I would have a suggestion that could really help things that I’m sure they haven’t even considered – allow retirement accounts to only change investment strategies once every 5 years. Yes, this is very draconian and even contrary to my rugged individualism leanings but the data is compelling.
DALBAR, a leading independent expert in evaluating, auditing, and rating customer financial performance has analyzed investor returns for over 30 years, and they have found once again in 2016 that the average investor did not realize returns that were on par with general market indices. For the 12 months ending December 30, 2016, the S&P 500 index produced an impressive annual return of 12%, while the average equity mutual fund investor earned only 7%, a gap of 5%. What do you think the underperformance is attributable to? The individual investor’s own actions – buying and selling fund shares at inopportune times. Election fear was the primary culprit in 2016 as many investors sold in anticipation of a poor market post-election.
Individual investor underperformance in 2016 wasn’t even that bad, though, probably due to the low volatility. The long term study results are far worse (see corresponding chart). For the 30 years ending 2016, the average equity investor made 4% while the market made 10%. That’s an incredible 6% per year! That’s well over $1,000,000 of lost opportunity on $100,000. This amount of money would solve almost anyone’s retirement crisis!
DALBAR’s conclusion in their 23rd edition of this study – investment results are more dependent on investor behavior than on fund performance.
I have referred to this study in past letters because I think the message is so important. Investment results are best measured over long periods of time and too often people muddy activity (or money movement) with effectiveness. In fact, results examined in shorter time frames are leading to decisions that DALBAR would say is doing measurable damage.
So what to do about it? Simple, select an investment strategy that fits your needs and then let it work. Five years is a fair time to review as good strategies are apt to do poorly in pockets because they pursue approaches that are different than the market. Chasing one and three year investment results does not work. We can help by constructing portfolios for you that we believe will pay off over time. Right now, we are encouraging all of our advisors to spend more time talking with clients about international equity opportunities and the risks inherent in the fixed income market. The benefits of these discussions are tangible and may be realized over time. And, according to DALBAR, luckily the biggest factor in determining the success of your portfolio is patience, and that’s well within your control.
Past Performance is not indicative of future results. All investments involve risk, including loss of principal. One cannot directly invest in an index.