Because of basic investor psychology — time to pull out my favorite chart again:
This is a multi-year study conducted by JP Morgan and Dalbar involving a very impressive set of data.
Notice over the last 20 years, had you invested all of your money in a diversified bucket of REITs, and left it there and not touched it, you would have had very nice returns. The same goes for the S&P 500.
Do you notice the little orange bar on the right? That’s the average investor. People get in their own way. They simply are incapable
of developing a long term plan and sticking to it. 80% of the value I
bring to most clients is investment psychology coaching — not investment
picking. (Sure that’s part of investment advice, but not the biggest).
I
get contacted on a REGULAR basis and have this identical conversation:
“You have me invested in X. It has only returned 3% this year while NFLX
is up 50%, move my money to NFLX.” Or, in our truly diversified
portfolios: “The stock market is up 6% this year and my portfolio is
only up 1%, what are you doing wrong, we need to change.”
No,
because you are not invested in the stock market — that’s too volatile
and has demonstrably lower return at higher risk than a properly managed
diverse portfolio over long periods of time — which is what most investors are concerned with.
So,
I try to remind them of the planning sessions we had, that they are on a
40 year investment horizon, we have a sound plan, and we need to stick
to it.
In terms of market investing — being
“off” for one year, two years, even five years is frequently
statistically insignificant in a 30 year plan. But, people don’t see
that, and are always “chasing.” It requires discipline to stick to your strategy.
I
will talk to high school students and ask “who wants to have over a
million dollars when they’re 65?” Everyone raises their hands. Then I
ask, “Who thinks they WILL Have over a million dollars when they’re 65?”
Depending on the demographics, this ranges from about 1 kid to 50% of
the class. In wealthy private schools, the numbers are higher, but not
in public.
And then I explain to them, that’s absurd. Every single person who is under 18 can easily retire with over $1m in their account. Even if you are a minimum wage slave your entire life. Take the first
ten percent you make, out of every paycheck, and deposit it into your
ROTH IRA. When you get your tax refund every year, don’t go spend it,
put it in your ROTH IRA. In Texas, minimum wage is $7.25/hr. That means
you deposit $29/week into your ROTH IRA. Live your life accordingly and
invest it in SPY, or a variety of major index funds (e.g. SPY, IWM,
etc.)
When you reach 65, you’ll have well
over $1m. There’s nothing magical, difficult, or complicated about it.
That’s it. Start at 18, put 10% away, retire in the top 1% of the
country.
So why isn’t everyone like Buffet?
Lack of discipline. It is so easy to say “hey I’m going to dinner Friday
night, I’ll just skip depositing that $29 this week.” Well now you’ve
hurt yourself. Stop it. Save.
The above is
the primary reason. The secondary reason is what Buffet does is not
available to most people. He used quite a bit of leverage in his initial
years (and is back to using a lot now). It’s a lot easier to make
money, if you invest other people’s money, using 100% leverage (e.g.
investing 2x the amount of money you actually have).
Last,
being a “value” investor also takes education and an understanding of
business and math. If you can’t read a 10-k report, a proforma, a
balance sheet, and have an understanding of cash flows, liabilities,
company debt financing, etc., it’s going to be difficult to pick the
best value companies. That said, that stuff is NOT complicated if you
can do basic algebra and can learn. But it is stuff you need to learn
(yes, you can teach yourself this stuff). But the “average” person
doesn’t know it.
So the “average person”
should stick to saving 10% or more of their money, every single month,
without fail. Your taxes get taken out of your paycheck up front. Put
the next 10% away — it’s called paying yourself first.