Few of us, I imagine, would be content to buy a car and receive half of it upon delivery. Yet this seems to be exactly what happens regularly in investing one's own money: various studies done in America show that the average private investor earns about 50% of what the stock market has generated in the long run. Using data and multi-year horizons, of the approximately 10% annually given by shares, a retail investor has realized 5% (we are always talking before taxes). Graphically this tragedy looks like this:
Where does this 50% lost return go? Although the proportions vary from case to case, some generic and approximate groupings are possible:
– 0.5-1.0% (of the 50% Lost Return, therefore approximately 0.3-0.5% of the total Asset Class Return) is attributable to non-derogable costs such as custody, investment vehicles, minimum number of transactions, administration and consultancy;
– 30-40% (15-20% of the total) is absorbed by management fees and other costs associated with active management;
– by far the majority of the “loss”, about 60-70% (30-35% of the total), is milled in the continuous in-and-out perpetrated with the intention of avoiding the difficult or more volatile moments of the markets (the infamous market timing).
Given the data, the reasons why this phenomenon continues to occur are necessarily of a psychological nature: if an investor, in logically implementing an investment program, reflected on all this, it is to be hoped that he would not get so busy easily.
The real question, however, I would say almost on an existential level, is this: assuming we accept a long time horizon and given that today the market is accessible to everyone at a reasonable cost, what is the reason for trying to beat it? Who the hell makes us do this? In no order of preference do these ideas come to mind:
Earning more is better than earning less; but is it worth risking almost 50% to get at most 10-20% (because that's what it is at best) more?
There is a need, for various reasons, for the assets to produce a return above the norm and therefore a solution is sought; situation similar to today with rates at 0, where investors regularly take much more risk than they should;
We have to do better than the neighbor, even if we don't know which of the two is really in the lead given the probable selectivity of the data exchanged (“I still have Apple from when it was at $2-pre-split,” or something like that);
On average, we all indiscriminately believe that we are "better" than the average, which is obviously not possible.
At the industrial level and playing on all these elements there is always an abundance of energy and in certain cases of effrontery of the generic mass of "managers" (management houses, consultants, distribution networks), which obviously has an enormous interest cheap to keep things as they are.
But think about it carefully: why beat the market?
-Picture Sources-
1. http://www.expertreviews.co.uk/cars/26698/nissan-half-leaf-twice-the-engineering-for-half-the-car
2. Orthos Advisory AG.
