If you want to be an investor, don’t be an average one. It can very well be a ridiculous proposition. The individual investors on an average would make mistakes, just like they did last year and this is evident from the report that was published in the latest report of Dalbar, the financial research company.
As per the study, the mistakes cost them quite a hefty sum of money even as the stock market saw a plummet last year, with S&P facing a 4.4 % loss.
The average investors saw a downfall of around 9.4 % and the trend only turned bad to worse over a 30-year period. That is what the study has revealed. In the month of October last year, the market had to lose 6.8%, while every average rated investor had lost 8%. August was comparatively a better month with the S&P seeing an improvement of 3.3%, though the average investors gained just 1.8%.
So, hypothetically, let us assume that an investor enjoys a return of 8% every year, and a second one gets 4%. Now, if each of them makes an investment of $200 every month over a 40-year period, the first investor will make $702,856 and the second one will make $237,100.
Therefore, the point that is to be proved is that some negligible difference of the fundamental parameters can lead to a huge difference, and that is something astonishing. The case was cited by Cory Clark, the Co-author of the report published by Dalbar.
Dalbar, which used to track the investors for a few decades before publishing the report, mentioned that the average investor is not able to decide when to join the market and when to leave it. Therefore, they would indulge in purchase or sale out on wrong times. In other words, they ‘time’ the market, and in the process lose out!