The Unexpected Way You’re Timing the Market, Ep #177

You do not think you are timing the market, but guess what? You probably are. In this episode of Best in Wealth, I will talk about what the average investor looks like and why you do not want to fall into that category. I will share why I think you are timing the market and what you should be doing instead. Check it out!

Outline of This Episode

• [1:32] I take every chance I can get to love on my wife
• [5:24] What Dalbar studies say about the average investor
• [8:30] Why the average investor does not achieve the benchmark
• [13:35] How the major asset classes performed in 2020
• [17:39] How the asset classes performed in quarter 1 of 2021
• [20:22] If you should not make unplanned adjustments—what DO you do?

What Dalbar studies say about the average investor

Dalbar researches all of the mutual funds that exist in the world. They can tell how the average investor compares to the performance of the overall market. Dalbar is the financial community’s leading independent expert for these types of evaluations. It launched in 1976 and has earned a lot of recognition. The study that covered the first 6 months of 2021 says that the average investor does worse than the benchmark. Why? That is what we need to figure out. You do not want to be on the losing end. If you are going to take a risk, you want to get what you deserve from the asset class. You want the reward.

Why the average person underperforms the benchmark

Part of the reason you will never achieve the benchmark is because ETFs and mutual funds have an expense ratio. After that expense, you want to do as well as the benchmark—or beat it. You want to reach financial independence as quickly as possible.

Another reason that people tend to underperform the benchmark is because they try to time the market. They sell when the market drops and sit on the sidelines until things are “better.”

But it is not just that. I think it is more subtle.

Most of the people I talk to claim they do not time the market. They say it over and over. But it is not just getting all the way in or all the way out of the market. The real problem is that you don’t have an investment plan. You might have a great idea in your head. But you do not get a documented plan down on paper.

Instead, you do a lot of reading and research and you pick your investments. You throw 50% in one thing, 25% in another, and so on. You make your selections off the yearly averages and you invest. Or you look at certain asset classes that are doing well and invest in them. Maybe periodically you see how things have changed and you make adjustments. But if you want to be a successful investor, you need to be methodical. You need a plan. This is what separates you from the average investor.

What asset class performance tells you about your investment strategy

Pretend for a moment that it is the 4th quarter of 2020. The S&P 500 averages 10% per year looking back 95 years. In the last 10 years, they averaged around 14% per year. Why was it on a tear? Facebook, Apple, Google, Amazon, Microsoft, etc. So a lot of people tilt their portfolios toward the S&P 500.

In the last quarter of 2020, the S&P 500 finished up 12.15%. Not bad, right? Except large-value did a lot better, ending the year up 16.25%. Small finished up 31.27%. Small value did even better, ending at 33.36%. Real estate was up 13% and international funds ended up 16%. The S&P was one of the worst performers of the largest asset classes.

So the funds that tilted toward large growth really missed out on these asset classes because they were concentrated on the S&P 500. Was it an anomaly?

The S&P 500 averaged 6.17% in the 1st quarter of 2021—but was still the worst performer. Here’s how other asset classes performed:

• Large value 11.26
• Small: 12.7%
• Small value: 21.17%
• Real estate: 10%
• International 8.33%

A good family steward probably looked at those returns and saw missed opportunities. So you made changes because you cannot take it anymore. But what was the best performing asset class in quarter two? It was real estate. The S&P 500 did 8.55%. But you shifted toward better returns from the past and did not consider the future.

You think you are doing the right thing, but you end up being closer to the average investor and underperform the benchmarks. That happens when you do not have a plan. Stop trying to chase returns—it is just another form of timing the market.

I would love to help you—schedule a 15-minute phone call with me!

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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