This is why retail investors can't stay invested

Since 1/1/1972, US Large Cap stocks have returned 10.66% annually to investors. That is not in dispute. I’m not making a prediction, I’m citing a fact.

But, if you sold a risk-free investment paying 10.66% per year to investors, many of them would ditch it. Why? Let’s call it GUAR_STOCK.

Because over the last five years, US large caps have returned 13.5% per year.

Inevitably, some will say… look my GUAR_STOCK is only getting 10.66%, the stock market has beaten it for FIVE YEARS by almost 3% per year! GUAR_STOCK is costing me thousands of Dollars per year!

And in the last year the large caps are up 27.7%! (true… VOO return including dividends). GUAR_STOCK STINKS!!!

Morningstar and other info sources give you the 1, 3, 5 year lookbacks and people are heavily influenced by them. And that is why retail investors underperform.

Because at the end of every run-up in stocks, comes a serious correction or bear market. I’m not making a prediction, I’m citing a fact. Trees to not grow to the sky. It’s coming someday. When and how bad and for how long? Unknown.

Then investors will do the opposite - they will panic because they have a loss, whereas GUAR_STOCK is up 10.66% per year and they’re (gasp) down for the past year! They will sell stocks when they should be accumulating.

And so it goes… human psychology can’t really be changed, especially when you talk about populations of people. It was evolved over a long time to suit our survival needs which did not involve the stock market.

I participate in Reddit investing pages, and this chasing performance thing is just epidemic now.

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I would have told 1995 self to just buy an SP500 fund from Fidelity or Vanguard and chill. But no, I had to listen to my brother.

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uh-oh… what did he tell you to do?

Buy Janus mutual funds. Wish he steered me into Vanguard. Would have been less stress.

There are hundreds if not thousands of systems, theories and sure-fire techniques to predict what the markets will do. They all have one simple and fatal flaw. That flaw is that the markets are driven by people’s decisions of perceived risk and reward. And those decisions are driven by human emotions that are driven by human perceptions.

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I was very unfair to retail investors. It’s worse for professionals. Why? If a portfolio manager doesn’t show outperformance in a short period of time, they’re fired.

Wes Gray has studied what if you were GOD ALMIGHTY and you knew exactly what stocks would do best over a five year period? You’d still be fired as a portfolio manager by your customers, because you’d still take some wicked drawdowns and your 1-year performance would lag the S&P500 at many points in history.

But the five year performance? It would be Godlike… 46% per year! But that’s the problem, we have attention spans of fleas… we can’t wait five years. We can’t wait a calendar quarter!

Even_God_Would_Get_Fired_as_an_Active_Investor.pdf (

there’s lots of data that proves that the difference over time between a professional stock market trader and a chimpanzee throwing darts at a dart board is nil.

The data also show that people will pay substantially more to avoid a risk than they will pay for the same value gain.

You know what is funny? I was CUSSING after the market closed today. Well, over the last month, the S&P500 is down -4%… and I’m down only -1.5% (so you can see exactly what kind of portfolio I have, a cautious one). People really do hate a loss more than they appreciate a gain.

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Why staying invested is the best strategy:

Missing the Market’s Best Days Has Been Costly

S&P 500 Index Average Annual Total Returns: 1994–2023


That study is actually incomplete, because some of the best days are immediately adjacent to the ten worst. It’s the same bad high volatility neighborhood.

But the retail investors will panic and sell after these bad days and thus miss out on the recovery days. I think that’s the point…you have to stay invested thru it all…

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My head knows that this is true but my heart is stupid. Even when I make these mistakes I realize I’m making a mistakes.

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There have been studies including this study by Morningstar that show the buy and hold outperforming market timing over the long term. This result was found even though the study used a market valuation strategy for the market-timing decisions.
From the study: “we calculated the returns of two portfolios, built up over time through regular income. The first, a Steady Equity (buy and hold) approach, puts all income to work in the Morningstar US Market Index. The second, Valuation Aware (market-timing) , invests in the same index when stocks look undervalued but otherwise is willing to hold cash until a more attractive period. …buying and holding, come what may, still generated better returns over the past 21 years, albeit by a narrow margin of around 0.76% per year.”

Oh that’s a terrible study. I’m actually shocked a CFA puts their name to it.

you have to study all possible 21 year periods possible from 1900 or as far as your data goes back until the present. Studying the last 21 years tells you nothing because the 21 year have been the poster child for Growth beats Value.

It even starts out terrible… he calls Valuation Aware “Market Timing”. That’s totally not accurate.

Market cap weighted indices are a stealth momentum strategy… buy more of what has gone up because… it has gone up!

If I decide to use market cap weighted indices, that’s as much of a choice as using valuation based indices, except the financial press (or the press in general) doesn’t really know how to think, and most of them are writing articles that just regurgitate what others write, and suddenly opinions become truth if they are repeated long enough.

The Morningstar study was well done.
Study design: Both arms of the study invested in the same total stock market mutual fund the Morningstar US Market Index. The study was designed with one variable. The buy and hold arm invested continuously during the study. The market timing arm held on investing when the market was overvalued (high price/fair value) than swept cash into the fund invested only when the market was undervalued. Market valuation is a common technique used for market timing. The study found that the buy and hold investing outperformed by around 0.76% per year

True. But both arms of the study were buying the same stocks in the same total stock market index fund. The relative performance of value versus growth would not affect the results

True, but not relevant to the design of the study. Market cap weighting is common for index funds-the S&P 500, the Wilshire 5000 Total Market, and the Nasdaq composite indexes. So are the Vanguard and the Fidelity Total Stock Market Index funds. The study is of value for investors who use these types of funds.

The study is still flawed for the reason I cited - you don’t do a study over 21 years which in retrospect have had possibly the best secular period of Growth outperformance over Value ever, and then expect the study to have ANY future predictive value. It’s like taking a soil temperature at many places in the summer and then concluding, “Yep, it’s hot, and my study over the past six weeks suggests it’s still going to be hot”. Well wait… you didn’t examine all six week periods over a long period of history. It’s just bad experimental design at a high level.

I lean towards asset allocation. That, and having a portfolio value goal that will allow me to not get too frenzy to chase return.

Small caps in my 401k really messes up my return since 2011. I have a hard time investing in SPY when I’ve taken a 13 year hit with VXF.

I’m wondering why small caps have performed poorly? Is it because of the regulatory environment? Why have the FAANG stocks done so well and what does that portend for the future of investing when only a few companies get all or most of the return?

I think there was a study 10 years ago that mentioned that 4% of stocks make up the entire return of the total stock market index and the most common result was a 100% loss with 96% of stocks averaging a 0% return.