DIY Investing vs. The Average Stock Market Return

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Why Make it Hard When You Don’t Have To?

When my son does mazes he always starts from the end of the maze and goes backwards to the start. When I first saw him doing this (age 4) I corrected him. You’re doing it wrong. You have to start on the left and figure out how to get through from the start. But was he doing it wrong? When he didn’t do it the “right way” after my coaching I got curious and asked him why. His answer. It’s easier this way dad!

Maybe we need to start looking at things from the finish line.

DIY vs. The S&P 500

The research company Dalbar, studies how active investors perform against the S&P 500. Their studies are done over 3, 5, 10, 20 and 30 year rolling periods AND their results are always the same.  Do It Yourself investors make things worse by trying to make things better. Dalbar doesn’t say that in their findings but that’s exactly what’s going on. And it’s exactly why the “pick of the month” newsletter approach cannot help people.

Here’s their research. If $100,000 was put it into the S&P 500 and the dividends were not reinvested then $100k would have a profit of $1,819,420 or almost any 30-year period. If an investor actively managed their money themselves with the help of their emotions and the “pick of the month” newsletter industry, they’d end up with a profit of $193,992. That’s a 9X worse return then just buying the market. If Dalbar included dividends on the buy and forget side the DIY’ers would be under performing 20X the market.

But it gets worse.
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DIY Stocks

DIY vs. The Bond Market

Dalbar also does research comparing the DIY World (read: pick of the month newsletters) against buying and holding a bond index. Over a 20-year period if an investor just put their $100,000 in a bond index it would grow to $280,188. Whereas the DIY’ers would grow their $100,000 to… wait for it… $110,051! That means the bond index made $180k while Do It Yourself’ers made $10k or 18X worse. This is what’s killing people’s futures. It’s not the manipulators or the Fed, it’s behavior. And the number one driver of DIY’ers behavior gap is the “pick of the month” newsletter industry.

What is going on?

When an investor’s earnings runway ends, they become a worse investor. Men become worse investors as they get older because they lose their earnings runway… the one thing that got them through the bad years of a market falling 50%. No one wants their accounts to be cut in half BUT when you are earning a full salary you know the bills can still get paid and you act “more” rational. BUT when the market falls 50% there is no buffer for the investor because his earnings runway has ended.  Then [unfortunately] they end up hurting themselves.

Have a strong earnings runway is also the reason why people in their 40’s rarely seek out investment help. You can always figure out what really works.

DIY Bonds

Activity Kills Futures

The takeaway from the two images above is that increased trading has a inverse relationship to stable growth. I’m not an advocate of buy and hold as your money will get hit from time to time with 50% falls, which is unnecessary of course. What I am sure about is that the Big Box Advisor will show you this same Dalbar research and say, this is why you should buy and hold and never get out.” This isn’t what I’m proposing. But if you did believe that idea, then you’d never even need a Big Box Advisor. You’d just buy the index and be done.

Stocks Over 37 Years

Simple is powerful. This is a chart of the S&P 500 index over 37 years. Over this time period, its gone up 24X. But, as you can see there are periods of big scary corrections. If you avoid those big scary corrections, which we did in 2000 and 2008 then the control you have over your future transforms your life. All you need to take away from this S&P500 chart is that “up and to the right” is the general direction the stock market wants to go and does go.


Bonds Over 37 Years

Next look at bonds.

Below is an image of bonds over 37 years, and you can immediately see the difference between bonds and stocks. Bonds have been stable and trending up. This is why Big Box Advisors tell you that they are going to put you into a 60/40 stock/bond split and rebalance your money once a year. These two images (the above one and the one below) show you why the Big Box approach has worked so far.

Both stocks and bonds have gone up over the past 37 years. Stocks have increased 24X while bonds have only increased 3X (not including dividends).  Unlike the stock market, this bond chart will not grow ever higher over time. You can’t tell with this chart but bond prices do not grow to the heavens. This is because the flip side to this bond chart is a yield chart. And if the yield goes to 0 you no longer make money. And once this 37 year bond bull market ends, the 60/40 split is going to struggle to protect its devout followers.

So to all of those who pray at the alter of the stock/bond split (read: long-only big-box advisers) be prepared because your day of reckoning is coming.



Commodities Over 37 Years And The Average Stock Market Return

Now, take a look at commodities. The immediate takeaway is price volatility. Commodities should not be a long term buy and hold strategy that you employ. But there are periods when being in commodities might make sense. The take away from our 10,000 foot view is commodities need an exit plan AND an entry plan. Buy and hold will kill you over the long run.



Currencies Over 37 Years And The Average Stock Market Return

In the next chart you can see currencies.

And by currencies I mean the U.S. dollar. What I want you to get is that over time currencies always go from upper left to lower right (lower). So if you have 80% of your money in the U.S. dollar it’s losing you purchasing power. The average annual loss is 2% to 3%. You need to realize that keeping your money in a currency does not mean you are out of the market. It is still part of the investment world. The take away…? You are always invested, even if that investment has been “set aside” in US dollars.


Get the Big Picture RIGHT First IF You Want To Beat The Average Market Return

From the above charts you can see that planet Earth’s four assets are not correlated the majority of the time. Sometimes money flows into one asset for years and then shifts into another.  This does not mean diversification is the answer. It’s not anymore.  Diversification is not the answer. This is why I rail against diversification. It doesn’t help. It keeps people’s money in underperforming assets for why? Stop playing from a rulebook written by old white men trying to get their Phd’s in the 1970’s. You have to know where money is flowing. 

In Your Corner,

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RC Peck, CFP  



  • Vince Tichenor

    July 15, 2017

    RC, After reading your last few blog posts I am wondering if you think we should switch are investments out of the S&P and into the emerging market ETF. Should we wait for a definitive break out before doing so? Should we do it slowly over a period of 6 or 7 months, or should we do half and half?

    Vince Tichenor

  • RC Peck

    July 20, 2017

    Hey Vince,
    I talked about how to move into Emerging Markets in the July Research Letter and on the July Live Q&A. Just go back and re-read or re-listen. I was clear how to do this. Thanks for asking.

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