[et_pb_section fb_built=”1″ admin_label=”section” _builder_version=”4.16″ custom_margin=”0px|0px|0px|0px” custom_padding=”0px|0px|0px|0px” global_colors_info=”{}”][et_pb_row admin_label=”row” _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” custom_margin=”0px|0px|0px|0px” custom_padding=”0px|0px|0px|0px” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”0px|0px|0px|0px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” custom_padding=”30px|||” global_colors_info=”{}”]Forty five percent of Americans with investable assets between $100,000 and $5,000,000 are Self Directed Investors (aka DIY investors) and their investment decisions are costing them 3-4%\u00a0annually<\/span>\u00a0vs. the market.<\/p>\n

Since 1994, Dalbar Research has conducted their “Quantitative Analysis of Investor Behavior<\/a>” to understand the effect of investor decisions on their results. In 2016 (the latest data available), DIY investors seeking a balanced 60\/40 (equity\/fixed) portfolio of mutual funds lagged the market by about 2.75% annually. Looking back over longer time horizons, over the past 5-, 10-, and 20-year periods, DIY investors have been down about 4% annually on average vs. the market\u2026think of this as the fee they pay Mr. Market for the opportunity to manage their own investments.<\/p>\n

When I talk with DIY investors, I hear a wide range of motivations for their decision to go it alone\u2026intellectual stimulation and engagement, desire to contribute to their family\u2019s future (particularly among the recently retired), my account is too small for a professional, or the love of \u201cthe hunt\u201d for that unicorn stock that\u2019s going 10x in the next 10 weeks. Underneath many of these comments is the theme that a professional advisor just isn\u2019t worth it to them.<\/p>\n

Vanguard did a recent study<\/a>\u00a0concluding that professional money management could be worth up to 3% annually on returns after fees vs. DIY investing. Interestingly, most of the DIY investors I talk with don\u2019t argue that point. Instead, almost to a person, each believes he or she in the \u201cabove average\u201d group of DIY investors who are likely doing as well or better than if they worked with a professional.<\/p>\n

This\u00a0Lake Wobegon<\/a>\u00a0effect (\u201c\u2026where all the children are above average\u201d) is technically known in behavioral economics as “illusory superiority<\/a>“, a quirk of human nature we all share that overestimates our own skills\/capabilities in relation to those same skills\/capabilities in others.<\/p>\n

Often, there can be a small number of data points over time to support one\u2019s illusory superiority. Case in point \u2013 I think my golf game is pretty good and I could compete in The Masters. This was confirmed last week when\u00a0Sergio Garcia took a 13<\/a>\u00a0on #15 during his first round. The guy\u2019s got a Green Jacket and posts a 13 \u2013 seriously, I could do that. Now, for anyone who has ever had the misfortune of sharing a cart with me, they\u2019ll confirm for you that me competing at Augusta is about as likely as me competing on the moon. But I can dream, can\u2019t I?<\/p>\n

My golfing illusion has no real effect on my life. Unfortunately, for many DIY investors, this quirk of human nature can create an unfounded overconfidence in their investment capabilities and have a significant adverse effect on their irreplaceable wealth over time. There\u2019s always a random trade or a stock pick that reinforces the illusion. But the data says they\u2019re falling behind (on average) vs. the market and suggests working with a financial professional can increase returns after fees (on average).<\/p>\n

How do you know if illusory superiority is part of your DIY investment strategy?<\/p>\n

Here\u2019s a quick exercise. You get a hot stock\/ETF\/Mutual Fund tip from CNBC, a subscription newsletter, a neighbor, or a co-worker. When you do the math, it looks like it could be worth about 3% on your total portfolio if it hits. Do you jump on it with both feet? If so, and you think working with a financial professional isn\u2019t worth it\u2026welcome to the human race and our continuing daily struggle with illusory superiority.<\/p>\n

To learn more about Dinergy Wealth Management and our commitment to help you care for your irreplaceable wealth, find us at\u00a0dinergywealth.com<\/a>.
\n[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":"

Forty five percent of Americans with investable assets between $100,000 and $5,000,000 are Self Directed Investors (aka DIY investors) and their investment decisions are costing them 3-4%\u00a0annually\u00a0vs. the market.<\/p>\n","protected":false},"author":3,"featured_media":276,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"Forty five percent of Americans with investable assets between $100,000 and $5,000,000 are Self Directed Investors (aka DIY investors) and their investment decisions are costing them 3-4%\u00a0annually<\/span>\u00a0vs. the market.\r\n\r\nSince 1994, Dalbar Research has conducted their \"Quantitative Analysis of Investor Behavior<\/a>\" to understand the effect of investor decisions on their results. In 2016 (the latest data available), DIY investors seeking a balanced 60\/40 (equity\/fixed) portfolio of mutual funds lagged the market by about 2.75% annually. Looking back over longer time horizons, over the past 5-, 10-, and 20-year periods, DIY investors have been down about 4% annually on average vs. the market\u2026think of this as the fee they pay Mr. Market for the opportunity to manage their own investments.\r\n\r\nWhen I talk with DIY investors, I hear a wide range of motivations for their decision to go it alone\u2026intellectual stimulation and engagement, desire to contribute to their family\u2019s future (particularly among the recently retired), my account is too small for a professional, or the love of \u201cthe hunt\u201d for that unicorn stock that\u2019s going 10x in the next 10 weeks. Underneath many of these comments is the theme that a professional advisor just isn\u2019t worth it to them.\r\n\r\nVanguard did a recent study<\/a>\u00a0concluding that professional money management could be worth up to 3% annually on returns after fees vs. DIY investing. Interestingly, most of the DIY investors I talk with don\u2019t argue that point. Instead, almost to a person, each believes he or she in the \u201cabove average\u201d group of DIY investors who are likely doing as well or better than if they worked with a professional.\r\n\r\nThis\u00a0Lake Wobegon<\/a>\u00a0effect (\u201c\u2026where all the children are above average\u201d) is technically known in behavioral economics as \"illusory superiority<\/a>\", a quirk of human nature we all share that overestimates our own skills\/capabilities in relation to those same skills\/capabilities in others.\r\n\r\nOften, there can be a small number of data points over time to support one\u2019s illusory superiority. Case in point \u2013 I think my golf game is pretty good and I could compete in The Masters. This was confirmed last week when\u00a0Sergio Garcia took a 13<\/a>\u00a0on #15 during his first round. The guy\u2019s got a Green Jacket and posts a 13 \u2013 seriously, I could do that. Now, for anyone who has ever had the misfortune of sharing a cart with me, they\u2019ll confirm for you that me competing at Augusta is about as likely as me competing on the moon. But I can dream, can\u2019t I?\r\n\r\nMy golfing illusion has no real effect on my life. Unfortunately, for many DIY investors, this quirk of human nature can create an unfounded overconfidence in their investment capabilities and have a significant adverse effect on their irreplaceable wealth over time. There\u2019s always a random trade or a stock pick that reinforces the illusion. But the data says they\u2019re falling behind (on average) vs. the market and suggests working with a financial professional can increase returns after fees (on average).\r\n\r\nHow do you know if illusory superiority is part of your DIY investment strategy?\r\n\r\nHere\u2019s a quick exercise. You get a hot stock\/ETF\/Mutual Fund tip from CNBC, a subscription newsletter, a neighbor, or a co-worker. When you do the math, it looks like it could be worth about 3% on your total portfolio if it hits. Do you jump on it with both feet? If so, and you think working with a financial professional isn\u2019t worth it\u2026welcome to the human race and our continuing daily struggle with illusory superiority.\r\n\r\nTo learn more about Dinergy Wealth Management and our commitment to help you care for your irreplaceable wealth, find us at\u00a0dinergywealth.com<\/a>.","_et_gb_content_width":"","_oasis_is_in_workflow":0,"_oasis_original":0,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-184","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"\n