We couldn’t help but notice something significant missing from Bob Doll’s chart which is making the rounds. No, not that Bob Dole – the one from Nuveen Investments. We stumbled across the below chart that’s up on Business Insider and the Reformed Broker Blog to name a few, and it looks at the 20 Year annualized returns by asset classes dating from 1992-2011 as well as what the “average investor” has made. Ignore for a second that this data is 2 years stale… it has a bigger problem in our view – managed futures wasn’t included.
(Disclaimer: Past performance is not necessarily indicative of future results)
Where does the other alternative investment rank? A few clicks in excel and voila – the adjusted chart:
Source: Barclayhedge’s BTOP 50 Index
(Disclaimer: Past performance is not necessarily indicative of future results)
Now – the point of this chart (and likely why it doesn’t matter that it’s two years old) is not to show how well REITs did, or how weird it is that REIT’s did that much better than the median home price – but rather to show the quite disturbing plight of the “average investor”, who despite the best intentions ranks at the very bottom of this list. We could likely recreate this list with the average hedge fund investor versus the various hedge fund category returns – the average managed futures investors versus the various managed futures strategy types… and so on – and get the same result.
Why? Why does the average investor end up doing so poorly? Their emotions – and specifically the emotions of fear, greed, and utter panic, are the likely reasons behind this discrepancy. People like going with a winner, and our innate fight or flee instinct tells us to get rid of or avoid losers. But these instincts can be an investor’s worst enemy, when it is more often than not the better choice to invest today in what didn’t work yesterday, and stop (or lower) your investment today in what did work yesterday.
It doesn’t make any sense to our hardwired brains – and perhaps the reason there is such a thing as market cycles and reversions to the mean is exactly because we are all wired in this way. So next time you’re looking at the new fund which has been up for three straight years with low drawdowns and high returns, or the next time you’re ready to ditch the well thought out, well executed investment thesis which hasn’t been performing of late (ah hmm…managed futures), take a look at the chart above and ask yourself whether the in at the top, out at the bottom investment method is the reason the average investor underperforms the very things they are investing in.