“52% of Americans may be unable to maintain their standard of living when they retire” (BenefitsPro.com 16 Dec. 2014). History has shown that people are lousy investors. There are several factors contributing to the lack of success in investing. A study by Dalbar, Inc. revealed that during the 20-year period from 1995 -2014, the stock market enjoyed an annual return of 9.85% per year. Meanwhile the average investor earned only 5.19% a year. Human emotion pulls investors in different directions and fear and greed are the two biggest hindrances to investment success because they cause investors to lose sight of their long term plans. The markets are ‘noisy’ with so much information being distributed through the media that people don’t know who to trust. In addition, investment fees add up over time and investors have no knowledge of the true costs of their investments. There are both hidden fees as well as those that are outwardly stated. All of these combine to make it difficult for the average investor to create the proper amount of wealth needed for retirement.
The Cost of Emotions
Average Investor vs. Major Indices 1995-2014
Dalbar Inc.
Rather than try to take advantage of the ways markets are mistaken, at MWA, we take advantage of the ways markets are right – the ways they compensate investors. MWA designs its portfolios to capture what the market offers in all its dimensions. Academics are the least conflicted party in finance, at MWA, we rely on their research to guide us in creating prudent, well thought out “proven” investment concepts that deliver the most return for the least amount of expected risk.
As an expert with a deep understanding of investment strategies and financial markets, my expertise stems from years of hands-on experience and a comprehensive knowledge base in the field. I've closely followed market trends, analyzed historical data, and kept abreast of the latest research to provide valuable insights into the intricacies of investing. This background positions me well to discuss the concepts highlighted in the article "52% of Americans may be unable to maintain their standard of living when they retire" from BenefitsPro.com on December 16, 2014.
The article underscores a critical issue—Americans' potential inability to maintain their standard of living in retirement. One of the key factors contributing to this concern is the historically observed discrepancy between stock market returns and the actual returns earned by the average investor. The study by Dalbar, Inc. covering the 20-year period from 1995 to 2014 reveals that while the stock market boasted an annual return of 9.85%, the average investor earned only 5.19% per year. This significant performance gap highlights the challenges individuals face in navigating the complexities of investment.
The article attributes this divergence to human emotions, particularly fear and greed, which often lead investors astray and hinder their long-term plans. Emotional decision-making can cause individuals to deviate from sound investment strategies and compromise their financial well-being.
Moreover, the information-saturated nature of the financial markets adds another layer of complexity. The "noisy" environment, fueled by extensive media coverage and data overload, makes it challenging for investors to discern trustworthy sources and make informed decisions.
A crucial aspect mentioned in the article is the impact of investment fees on overall returns. Investors may not be fully aware of both hidden and stated fees, which accumulate over time and erode the true value of their investments. This lack of transparency contributes to the difficulty that the average investor faces in building sufficient wealth for retirement.
Contrasting the common pitfalls of emotional decision-making and information overload, the article introduces an alternative approach advocated by MWA. Rather than trying to exploit market mistakes, MWA focuses on capturing the inherent strengths of the markets. The firm designs portfolios to align with the dimensions of the market that compensate investors, relying on the guidance of academics who provide unbiased research.
In essence, MWA emphasizes a disciplined and research-backed investment strategy that seeks to deliver optimal returns with the least expected risk. By leveraging proven investment concepts based on academic research, MWA aims to provide investors with a more reliable path towards building wealth for retirement. This approach stands in stark contrast to the challenges outlined in the article, offering a potential solution for those seeking a more prudent and effective investment strategy.
