Every so often a column on personal finance comes along that’s a little like the scene from the Hitchhiker’s Guide to the Galaxy when the civilization that built the giant super computer, Deep Thought, asks it for the answer to Life, the Universe and Everything. “You’re really not going to like it,” Deep Thought warns, knowing its human developers were not going to appreciate the answer. Likewise, when it comes to why your investments are underperforming, you’re not going to like some of the answers.
Over a long period of time, the stock market returns somewhere around 10% per year, yet most people are not coming anywhere close that to that kind of return in their personal investments. There are reasons your investments are underperforming, and at least a few of them are the fault of person you see in the mirror every morning.
Lack of Interest
Few Americans take the time to do any reading on the subject of investing, and even fewer get any kind of formal training in the topic. The little information they do get is likely to come from the mainstream financial media which is, to a greater or lesser extent, controlled by the very people trying to take your money. At a minimum, invest $15 in a book like Why Didn’t They Teach Me This in School?: 99 Personal Money Management Principles to Live By by Cary Siegel or Get a Financial Life: Personal Finance In Your Twenties and Thirties by Beth Kobliner.
There are reasons your investments are underperforming, and at least a few are the fault of person you see in the mirror.
Another thing to do is sit down and read the prospectus of your 401(k) plan, if you have one. Understand the plan options, and the fees associated with each one. Investment plan management companies are required by law to disclose the relevant information, but they are under less obligation to make it easy to understand.
Overconfidence
The flip side of that coin are those who think they have marketing timing and stock-picking figured out. The financial highway of life is littered with the bodies of people who thought they could beat the market. The truth is if you have less than a $1 million invested, there’s no way you’re going to beat the market with constant trading. Even if your trades are only $7 each, then 3 trades a day is $420 a month if you just trade on work days, which works out to $5,040 a year. If you only have $50,000 to invest, that means you have to clear more than 10% just to cover your trading fees.
Fear
Before the big crash of 2008, there was the bursting of the dot-com bubble and Black Monday, and a host of other minor market meltdowns. Every time the market craters, some people cash out at the bottom, vowing never to invest money in the stock market again. Once bitten, twice shy. Live by that old sage advice when it comes to investing, and you’re almost certain to lose money in the long term. When investing in equities, time is equally as important as timing.
Knowledge is power, and managing your financial life would seem to be worth a few hours of your time to educate yourself about your investment options and the best places to put your money to work. If you haven’t made any changes to your 401(k) in the last five years, today might be a good day to read through the materials companies distribute for open enrollment this time of year. Read through the plan options, figure out which ones have the lowest fees, and find out if there’s a charge to move your money between plans. If your investments are lagging, the most likely guilty party is you.