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Why Do Most Investors Underperform?

The Overwhelming Evidence

THE PROBLEM

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:

  1. They have never developed a comprehensive investment or wealth management strategy.
  2. 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.
  3. 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:

Penalty Box A:

Investment Mistakes

Penalty Box B:

Financial Mistakes

Penalty Box C:

A combination of the two above

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.

Penalty Box:
A
B
C

Bob owns his own business and he displays strong financial stability and discipline to manage his personal finances, but his Investment portfolio is riddled with mistakes. This lands Bob in Penalty Box A where he will perpetually suffer from less than desired results from a growth and preservation perspective until he learns to overcome this penalty.
 
 
 
 
 
 
 
 
 
 
 
 

Penalty Box:
A
B
C

Julie sold her thriving business of 22 years and has practiced solid Investment discipline and literally enjoys a great knack and talent investing, but her talent is limited to investing and she pays a steep price from a lack of sophistication and support related to balance sheet, cash flow and advanced tax and estate planning. This behavior lands Julie in Penalty Box B where blind spots cause costly financial mistakes that deteriorate her level of financial security and independence.
 
 
 
 
 
 
 

Penalty Box:
A
B
C

Alan is a very successful business owner, but his financial house is not in order. He struggles both with making poor investment decisions and personal financial choices. This lands Alan in Penalty Box C, AKA “Solitary Confinement”. In such a state, Alan’s business and income give him a false sense of security and shield him from seeing the great waste and mistakes made. It often is not until the business hits a rough patch or a liquidity event occurs that Alan will become aware of such a weakness.
 
 
 
 
 
 

Penalty Box:
A
B
C

John purchased and sold several businesses throughout his career and he is ready to retire. He has lived a good life, travelled the world, and certainly enjoyed some extravagant toys. His personal financial decisions have been very sound and he has avoided making any major investment mistakes. He is not sitting in any of the above referenced Penalty Boxes, he has just the right professional support and just the right personal habits and behavior. He enjoys tremendous financial strength, agility, flexibility and endurance and he has an extremely solid investment portfolio void of dogs and void of unnecessary or imprudent risks.

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?

Our Solution

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:

Evidence Based Investing (EBI)

Evidence Based Investing (EBI) is designed to filter through the noise, information, hype and emotion in the marketplace in order to make reasoned investment decisions and avoid as much Investor Behavior Penalty as possible. This discipline seeks to eliminate, mitigate or reduce investment mistakes that would otherwise solidly place an investor within Penalty Box A.
 

Strength Based Wealth Management™ (SBWM)

Strength Based Wealth Management™ (SBWM) focuses on the financial factors that can optimally enhance an investors’ strength, durability, agility and endurance, seeking to minimize vulnerabilities and further immunize them against the Investor Behavior Penalty. This discipline seeks to eliminate, mitigate or reduce financial mistakes that would otherwise solidly place an individual within Penalty Box B.

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.

 

Good

Combine good EBI with great behavior, and we believe the investor could consider themselves an accomplished, optimal and highly penalty-resistant investor.
 
 

 

Good

Combine good SBWM with great behavior and we believe the investor could confidently consider themselves on top of their financial strength, agility, flexibility and endurance levels, to the point of enjoying a true sense of financial security and independence.

Best

Mix the two disciplines together, and we believe the investor could consider themselves an accomplished, depletion-resistant wealth steward, insulated from the Investor Behavior Penalty and confident of their financial future.

The Landscape

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 )

DOWNLOAD THE WHITE PAPER

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.”

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*Ranked/Named among Top, Best and Most Exclusive Advisors sources: Barron's March 2016, 2015, 2014; Advisory HQ March 2016; Financial Times June 2015; Five Star Professional November 2015, 2013, 2012,2011, 2010, 2009; Mutual Funds Magazine January 2001; NABCAP September 2010, 2011, 2013; Worth Magazine July 2002, January 2004, October 2004, October 2008; Wealth & Finance International, October 2014. Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Janiczek & Company, Ltd. is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of Janiczek & Company, Ltd. by any of its clients. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Janiczek & Company, Ltd.), or any non-investment related content, made reference to directly or indirectly on this website will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this website serves as the receipt of, or as a substitute for, personalized investment advice from Janiczek & Company, Ltd. To the extent that a viewer has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Janiczek & Company, Ltd. is neither a law firm nor a certified public accounting firm and no portion of the website content should be construed as legal or accounting advice. If you are a Janiczek & Company, Ltd. client, please remember to contact Janiczek & Company, Ltd., in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Janiczek & Company, Ltd. current written disclosure statement discussing our advisory services and fees is available upon request.

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