investing in mutual funds

Nothing defines humans better than their willingness to do irrational things in the pursuit of phenomenally unlikely payoffs. This is the principle behind lotteries and dating…”
– Scott Adams, creator of the comic strip Dilbert

UPDATED May 2016: With full confidence, I can say that you are irrational when it comes to investing.

I know this not from talking to your broker or your mother-in-law, and I haven’t hacked into your portfolio statements. I know this because you’re human.

What will happen in the stock market isn’t predictable. But one thing is absolutely for sure and for certain: Investors are predictably irrational. We’re not talking smart or stupid, sophisticated or naïve. We’re talking across-the-board irrational.

So maybe you’re thinking that you’re the exception. You think you can handle the volatility of the market by just gritting your teeth and praying everything turns out all right as you roll the dice in the Wall Street Casino. Or maybe you think that at the first sign of trouble, you’ll be able to bail out of stocks and into bonds or money market funds to lock in your gains.

Researchers say, “Nope, that’s not what’s happening…”

Investors earn returns over time that are far lower than those quoted by mutual fund firms. In fact, it’s not even a close race.”

This is the conclusion of DALBAR, Inc., the well-respected independent investment research firm.¹

For the past 20 years, “the average equity investor barely managed to eke out an annualized return that outpaced inflation.” The average return was 3.49% per year – just slightly more than the inflation rate for that period!

Asset allocation and fixed income investors weren’t so lucky (if you can call that “luck”); they lost ground after adjusting for inflation.

Why most investors don’t come close to getting the returns touted in mutual fund prospectuses…

There are plenty of reasons for this. For starters…
[Read more…] “The truth about investing in mutual funds”