(But rather, what you do know that isn’t true!)
According to a recent report, investment returns over the past two decades show a stunning failure by individual investors. Over the period of June 30, 1999 – June 30, 2019 the average investor earned only 1.9% annual returns. Surprisingly, this was not because there was no opportunity. Actually, the reverse was true. During the same period the study reported that the S&P 500 earned 5.6%, bonds earned 4.5%, and real estate, gold and oil all earned over 7%. More troubling, inflation was 2.2%.
How can this be true? Behavioral economists point to a consistent theme: investor overconfidence. Many investors believe they know more than they do, or that their knowledge is more precise than it actually is. Focusing on short-term losses, these investors were blind to the more important pursuit of longer-term rewards. Practically speaking, this meant they often sold when the market was low and bought when the market was high. What they “knew” turned out to be wrong.
How do you protect yourself from overconfidence? Some depend upon friends or family to protect them, and that is a good place to begin. However, ask yourself this; “who among my friends and family understands my financial goals and is qualified to help me navigate the world of investments and strategies? After all, it’s a big responsibility, one that could change a relationship. Others rely on help they find on the internet. This advice is often very general—it has to be to gain enough viewers.
At Goostree Financial Group, we have been helping our clients combat overconfidence for decades. Why should you be earning just a fraction of what your underlying investments do?
Source: Dalbar, cited by JP Morgan Asset Management based on data as of June 30, 2019, included in their 3Q 2019 GTM.