Why Millions of Investors Are Underperforming Markets

Why Millions of Investors Are Underperforming Markets

With very rare exceptions, no one gets rich through their own labor. Salaries in many industries are just barely enough to put food on the table, a roof over our heads, and save a little extra at the end of the month if we’re frugal. The key to gaining wealth is to invest whatever we have managed to save and invest it in productive assets that will gain value well into the future.

For decades, most investors and investment advisers have operated under the assumption that investing in stocks is the best way to build up wealth. They point to the long-term growth rate of stocks, which have historically averaged about 7% returns. But they conveniently forget that those returns haven’t occurred equally over time. Depending on when investors start their investing, their overall investment returns could vary significantly.

Historical Stock Market Booms

Stock market gains have normally occurred in boom periods, benefiting those investors who were lucky enough to be in markets at the time, but not providing benefits to those who weren’t. The Dow Jones Industrial Average hit a high over 381 points in 1929 before markets crashed during the Great Depression. It took 25 years for the Dow to regain those levels, meaning basically a lost quarter century for anyone who had tried to invest in stocks during that time.

From 1954 to 1966 the Dow rose to nearly 1,000 points before once again petering out. Between 1966 and 1982 the Dow traded in a range roughly between 600 and 1,100 points. After reaching a low under 800 points in 1982, the Dow catapulted upward, with the 1982 to 2000 stock market boom only ending after the Dow peaked at 11,722.98 points in January 2000.

After the dotcom bubble burst, it took over six years for the Dow to regain its previous highs, with about a year of gains until it reached an all-time high in October 2007. After the 2008 financial crisis, it took another five-and-a-half years before the Dow regained its previous high level in 2013. From there, stock markets nearly doubled until they reached new highs in February 2020.

If we remove the stock market booms of 1954-1966 and 1982-2000, the Dow Jones would currently be trading at around 850 points, rather than the 26,000 at which it is currently. That means that from 1929 to today, a period of 91 years, only 30 trading years have been responsible for 97% of stock market growth. Those lucky enough to have been alive and investing during those periods saw great gains to their portfolios, which has skewed investor perceptions of stock markets and their ability to create wealth.

Changes in Investing

The 1982-2000 stock market boom in particular has skewed views of stock markets because many of the people who made such great gains during that time period are still alive, and still expect to see those types of returns. With average annualized gains of nearly 15% per year, you would have had to work hard to lose money in that market. And with those types of gains, there was really no need for many investors to try to outperform markets. They were perfectly content to match market performance.

That was combined with studies comparing the performance of actively managed funds, those whose managers actively picked stocks to try to outperform market indexes such as the Dow Jones and the S&P 500, and passively managed funds, those who merely tracked those indexes. Study after study demonstrating that actively managed funds were more likely to underperform stock market indexes led to a rise in passive investing, with investors content to stick their money in funds that sought only to match the performance of major stock market indexes. In fact, passive investing has become so prevalent through index funds that it now rivals active investing in terms of the amount of money under management. But as many investors find out the hard way, trying to match an index doesn’t guarantee great gains.

Stock Markets Underperforming

There are two problems with passive investing today, the first one being that index funds will never match the performance of the index they track. The thing to remember about any investment is that you’re going to have to pay some sort of fee. From management fees to exchange listing fees to account maintenance fees, those fees can add up and take a huge bite out of your investment returns. And over the 30-40 year investing horizon of the typical investor, that means losing thousands of dollars in potential gains.

Many investors look at a fund’s performance but don’t look at the fees that are associated with it, so they assume that an S&P index fund will match the performance of the S&P 500. But that’s not true. If we imagine an initial $100,000 investment in an index fund whose index achieves 7% growth annually, even a minimal 0.2% management fee will result in 6% fewer savings after 30 years, or $45,000. After 40 years, that turns to nearly an 8% loss, or over $115,000. That’s not chump change.

That brings us to the second problem, namely that stock markets have been performing poorly in comparison to their historical averages. Over the past 20 years, the Dow Jones and S&P 500 have average annualized gains of 4.7% and 4.4% respectively, far below their long-term averages, and far worse than the average gains of the 20 years before that. Those numbers are also below the returns investors could have been making from other investments such as gold, which has averaged 10% annualized gains over that same time period.

It’s clear that investors have faced a lose-lose situation ever since the collapse of the dotcom bubble, with poor growth rates in stock markets combined with investment fees taking a huge bite out of their potential retirement savings. And with prospects for stock market growth not looking that great right now, they’ll have to start thinking outside the box if they want to continue growing their wealth over the next decade.

Thousands of investors have already taken advantage of the opportunity to move their retirement savings into a gold IRA. With a gold IRA, investors can roll over existing retirement assets from tax-advantaged retirement accounts into a new IRA that invests in physical gold coins or bars. That gives them the opportunity to benefit from gold, the stability it offers, and its potential for price appreciation in a weakening economy, while still retaining the same tax treatment as their existing retirement accounts. Rather than continuing to indulge in the lose-lose likelihood of stock markets, they can take advantage of the win-win opportunities that gold offers.

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