There are forums, blogs, and podcasts dedicated to those wanting to improve their investing game. The average investor has underperformed the market and likely will continue to underperform due to the multitude of behavioral biases intrinsic in us.
From the above, even though REITs performed at 11% or S&P500 performed at 8%, the average investor only pulled out 2.3%!
Individually, we believe we know something that others don’t when it comes to a particular stock. We buy something, hoping it will go up, sell to lock in the profits and look for the next investment option to speculate on.
In the above graph, I pulled out some of the best-performing months of the S&P500 in gray and you can see how the average investor did in comparison. The discrepancy is shocking.
Our Homes In INVESTMENT Portfolio
We do this with our homes as well. Most healthcare professionals whom I have spoken to have believed their home to be a good investment. Nobody that I know has bought a house assuming that it’s a horrible investment and that it will likely go down in value. And yet, despite what popular media says, the average residential home has done only a touch better than inflation.
Here is where the average physician might say that their home is different. It’s in a better school district, a better neighborhood, better access, and more desirable weather. They might cite that they made money on their previous home or that it’s already up – often because all home prices are up, not just theirs.
Men who are in the dating game make similar mistakes. They try everything under the sun to get the attention of a particular lady, go on multiple dates, just to find out she’s not the right one. They trusted their initial impression which likely was riddled with biases of her appearance, something she did that was pleasantly familiar, and possibly how easy she was to approach.
We even display such behaviors with our careers. We keep hanging on to a career that might feel depleting or not going anywhere because we think that the end will justify the means – there is a value we think the job has which we can’t justify or show. Because other physicians are in the trenches with us, this is the way it should be done.
Even worse, some of us will justify staying in their jobs because the benefits their hospital or group offers is too good to pass up. So we are swayed by the “dividends” of their job but not the job itself – in a way, one could say that the underlying investment strategy isn’t sound even though the investment (practicing medicine) is solid.
With this line of thinking we stay in bad situations and assume that there is nothing else outside of what we’re doing that could be better. Just because something is unfamiliar or unknown, it must not exist.
Where Do We Get Our Information?
Healthcare professionals aren’t financial experts and we don’t have degrees in economics or any in-depth training regarding financial matters. Therefore, the information we come by is often whatever is dispersed on the internet. Though there are millions of pages regarding a topic, the algorithms of the web ensure that we see mostly the pages with the heaviest marketing.
It’s important to consider the sources where we get information and scrutinize them.
1. From Public Media
The list would be endless, think of any talking (or yelling) head on TV or on the internet and that’s often the source of information for many investors. Popular stocks, supposed market trends and unreliable investing strategies are blasted all over public media in hopes to entice the public.
I don’t see how I can trust a source that has conflicting interests. I wouldn’t trust myself if I had conflicts of interest, much less some person making millions a year.
A research article funded by a pharmaceutical company is as reliable to me as a personal finance website which advertises loan products to physicians. It’s a shady world out there people, most sources of information are just business entities cloaked as that.
2. From Advisers Who Can Sing Only 1 Tune
There are amazing financial advisers and there are those that have 1 medication in their arsenal for each illness, even if a medication isn’t needed.
How do most healthcare professionals find their financial adviser? They don’t – the FA finds them. Through shitty dinners, superficial talks and when trying to advertise an insurance product to them. Yuck.
Are there amazing FA’s who also sell insurance products? Sure, but the average person is not going to be able to tell. Take it from a person who has had many terrible financial advisers, some of whom I recognized as terrible right away and others which ended up costing me a church of money.
3. From Friends/Parents
Though friends and family mean well, what works for them may not work for you. And unfortunately, few individuals keep adequate records to know how well their portfolio has actually performed. It’s inherent in human nature to ignore our faults and recall our victories – not intentional, we aren’t ill-intentioned, just how our circuitry works.
I can’t give a friend investment advice because I don’t understand their risk tolerance. I wouldn’t be able to be that voice of reason when the market tanks. The best financial plan is the one that we can follow whether times are shitty or when the tide raises all boats.
Why Is The Average Investor Underperforming?
I use the word “fail” perhaps a bit to drive the point home but also because each investment strategy has a realistic benchmark. If the investment itself returned its ideal rate but the investor underperformed, then the investor failed.
There are books written on this subject, numerous books… books with words and shit! I will mention the most common reasons that have come across in conversation with my group of friends and colleagues.
And yet again, I will plug in how important it is to have a financial expert by your side. Someone who can keep you true to the game but also someone who you can hold accountable for any discrepancy in your financial portfolio.
I realize that the Godfather and other prominent personal finance blogs geared towards healthcare professionals poo-poo the need for a financial adviser. But we are the nerds of personal finance, we actually enjoy this shit. Unless you spend 1-3 hours a day thinking, reading and writing about personal finance, I think it’s prudent that you have one heck of a good financial adviser on your side.
We think that it’s a bad thing for the economy to trend downward. When this happens we look at the media panicking and we follow suit. Often, this translates into us selling our positions and locking in the loss.
At best, we stop contributing to our investments out of fear and thereby lose out on future ability to earn dividends. The same investments which are now at a lower price are no longer purchased with our disposable income.
2. Herd Mentality
We invest in what’s hot instead of what’s not. The idea behind creating an asset allocation is that you put more money into the poorer performing investment and less into the better performing fund. This is the exact opposite of what the average investor does.
Currently, many are buying physical real estate, driving the prices up for everyone else, making it a bad investment – and yet many are buying real estate. Ironically, the majority of real estate investors are recognizing this and staying on the sidelines.
Many investors are dismissing bonds – interestingly, some are dismissing bonds indefinitely, as if this current market trend will be the norm forever to come. So while some should be investing in the lower cost bonds and investing less money into the more pricey equities market, they are doing the opposite.
3. Excess Risk Exposure
No matter how well-designed a portfolio is, if the person owning that portfolio isn’t comfortable with its wild fluctuations then they will sell when they should be buying and buy when they should be selling.
It’s really important to have a broad understanding of investments in the global economy and be able to make it through undesirable patches. If you haven’t gained the adequate expertise to view it in such a fashion, have a professional guiding you through it the first few years.
4. Hobbyist Mentality
Investing isn’t a game, it’s not a hobby, it’s not something to replace your online shopping habits and we are unlikely to develop our own little spin on it that will make it profitable in the long-run.
In the short-term you might be turning a profit investing your money – but that’s like a crackhead saying there is nothing wrong with crack because he hasn’t died from it yet and is still able to run faster than people half his age. Your strategy might work with a bull economy but what it will it be when it tanks? If you are just gonna keep your investments on the sidelines during a bear economy then you will lose out far more than you ever gained.
Investing can’t be fun. Unless you are bringing a skill or a change to the underlying investment, you aren’t going to make the needle move. If you can spot a great deal, make some changes to it, and flip for a profit, then your personal skills can help you outperform others. This isn’t the case with 90% of investments – Plain Jane cannot influence the investment.
5. Excess Cash
I thought a lot about this 5th point, whether I wanted to include ‘holding excess cash’ under the list of reasons why the average investor underperforms the market. And then I did my research and realized that in fact, it’s one of the bigger problems affecting the healthcare professional.
We have a lot of income. Even if you’re a pediatrician and think that you ‘only’ take home $130,000 or you’re a PA and you are ‘only’ netting $75,000 for the year – you are a very high earner with a very secure job. Sure, the median income is ~$50k but do you believe the median household will make it through the next economic downturn?
The healthcare professional’s overhead is also incredibly high. We spend more than we need to in order to enjoy the life we desire. Therefore, when it comes to setting cash aside for 3, 6, or 12 months of emergency funds, we might have somewhere around $50,000-100,000 set aside in cash.
Cash doesn’t earn money. In fact, it can lose value. It can be part of a healthy portfolio but I see my colleagues thinking of cash as a safety hedge against risk. Many financial experts will disagree and tell you that the risk you are taking is keeping excess cash.
How To Fix Your Underperforming Portfolio?
The solution is to take you out of the equation. The only way your portfolio will perform better is if your biases cannot hinder the portfolio’s performance. If you are the one making the buy/sell decisions then it’s likely that you will have lower returns.
I wouldn’t let my emotions (me) control my diet and exercise habits because I would be one fat mofo. I’d be eating pizza and Twinkies and chasing it with Tequila Greyhounds. As for the gym? I’d go in spurts – just enough to injure myself and miss even more time from the gym.
And I don’t let ‘me’ control my investments, either. Otherwise I would jump all over the Real Estate Syndications, I’d be buying penny stocks in this Bull Market and invested mostly in Small Caps.
It’s best to come up with a strategy, a plan, an investment manifesto and simply stick to it. That way, when the newest, hottest, sexiest investment strategy comes on the scene (ehem…real estate syndications… ehem) then you won’t just paw at it like a cat on nip.
The point isn’t for the savvy healthcare professional to outperform the market – there isn’t even any need for that. The markets have performed plenty fine ever since their inception. For 99% of us, just getting a piece of the pie should be more than enough.