We consistently see evidence showing that most investors underperform market averages by a significant margin.2
For investors with large portfolios, this “Investor Behavior Penalty” (IBP) becomes even more significant because of the dollars involved. What can be a modest penalty for the average investor can dramatically impact the wealth accumulation, retirement income streams and financial endurance levels of high (those with working investment assets of $1-$20 million) and ultra-high net worth investors (those with portfolios exceeding $20 million.)
Even the most intelligent and accomplished high and ultra-high net worth individuals make investment decisions that are contrary to their own best interests. They trade when they should hold, reserve cash when they should invest, or buy and sell at precisely the wrong time or at unadvisable costs and constraints. Various factors may contribute:
- They have never developed a comprehensive investment or wealth management strategy.
- They follow the counsel of biased advisors who represent and/or are compensated to promote investment vehicles or approaches that are, under the strict standards of Evidence Based Investing, penalty prone or laden.
- Most likely, they succumb to the vast quantities of noise, information, hype and emotion perpetuated by the Internet and the 24/7 financial news cycle.
Regardless of the cause, what is the consequence of the Investor Behavior Penalty?
Comprehensive studies, such as the annual Dalbar, Inc. QAIB study1, now in its 20th year, reveal the severe underperformance level of the average investor. This study has revealed that equity investors lagged the S&P 500 index anywhere from 3.96% to 9.5% annually over every rolling 20-year period since 1994.
Since high and ultra-high net worth investors are not typically 100% allocated to equities, we examined the year-by-year performance lag of both equities and fixed income (bond) investors, using the Dalbar data as a basis. Our study revealed that over the last 20 years (1994 thru 2013), the average moderate/aggressive (60% stock/40% bond) investor would have experienced a 2.66% annual lag compared to directly investing in the S&P 500 Index and Aggregate Bond Index, a combined 32% lag over the two decades studied.
To illustrate the consequences of the IBP over time, consider an investor with a $5 million portfolio, adding $500,000 annually for 20 years (1994 to 2013.) The consequences are significant: 33% less accumulated over 20 years. This hypothetical ultra high net worth investor realized $33 million instead of $49 million, a $16 million deficit.
The Solution – The Janiczek® Perspective
If you want to find a solution, you must start by identifying the root of the problem. Hence, the root cause of the IBP is the vast amount of noise, hype, information and emotion investors are required to filter through to make prudent investment and financial decisions.
Not all information or emotion is bad, but most of the noise and hype is. Why? Because noise and hype acts like fog making it highly unlikely to identify the useful information and emotion. Our job at Janiczek® is to filter the noise and hype so that your investment portfolio and wealth is prudently managed with the aid of useful information and emotion.
The Penalty Box
We further define and categorize the consequences of “Investor Behavior Penalty” into Three Penalty Boxes in which we classify mistakes:
Here are 4 financial personas based on the Penalty Box image above. These personas illustrate the effects of investment mistakes and financial mistakes on overall wealth.
Out of our four financial personas, John is best off and Alan is in the worst shape. However, it is important to note that the distance between John and Alan is accelerating more so with every month that passes. Bob and Julie are pretty much in the same boat. Both of them are headed in the right direction, but there is no positive acceleration and there is ample room for improvement.
Everyone wants to be like John and no one wants to be like Alan – yet most of us are like Bob and Julie. So how do we become more like John?
Based on extensive internal research, along with credible external studies, Janiczek® has concluded that no single instrument can help investors make clear judgments in a chaotic, information saturated environment. Rather, the combination of two disciplines form the framework for Janiczek’s® comprehensive investment and wealth management practice:
The combination of Evidence Based Investing (EBI) and Strength Based Wealth Management (SBWM) is, in our view, the best practice solution to overcoming the Investor Behavior Penalty. This is how hypothetical Persona John manages his money to avoid being restrained or stuck in Penalty Boxes A, B and C.
Finally, to be optimally effective, EBI and SBWM should not limit the extent of assets involved in both disciplines. Rather, it needs to recognize and optimize across the full landscape and hierarchy of high and ultra-high net worth investor wealth:
- Safety – Ensuring and protecting the wealth that has been established
- Market – Participating in market-like asset growth
- Aspirational – Exposing assets to the possibility of outsized gains that elevate net worth to a higher level
Regardless of whether you are working to accumulate more wealth or whether you are retired living off the fruits of your labor, managing your investments in today’s global environment can be daunting. Janiczek’s® comprehensive investment and wealth management process helps to remove much of the uncertainty and mystery in achieving your financial success.
If you are ready to start a conversation with a team who specializes in high or ultra-high net worth investment services, let’s talk.
Schedule a face-to-face meeting or telephone conference with one of our expert team members today. Dial 303-721-7000.
Read our White Paper “Evidence Based Investing for High and Ultra-High Net Worth Investors” Learn how to more fully understand both the problem and the recommended solution to the widespread underperformance issue.
( 1 “Dalbar’s 20th Annual Quantitative Analysis of Investor Behavior 2014.” Dalbar Inc., 2014. )
( 2 http://www.morningstar.com/advisor/t/115631283/mind-the-gap-2016.htm )
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To learn more and dive deeper into the substantial research supporting our approach to investment and wealth management, download the full White Paper “Evidence Based Investing for High and Ultra-High Net Worth Investors.”