For the past 20 years, a research firm called Dalbar has been comparing mutual fund investors’ actual returns with the returns of the stock market. And for all of those 20 years, it has found that investors underperform the market. The key question is, “Why?”

According to Dalbar, it’s largely because investors are their own worst enemies. Instead of staying in the market, they move in and out, selling when declines become too steep to stomach any longer, and getting back in only after the market has already made up considerable ground.

The gap between the market and the typical fund investor used to be much greater. When Dalbar conducted its first study, it found a gap of over 10.5 percentage points between the market’s average annual return over the most recent 20-year period and that generated by the average fund investor’s portfolio. In its most recent study, that gap narrowed to just a little over 4 percentage points, an improvement it credits to “investor experience and education.”

Still, the company says such improvement has stalled in recent years, and it no longer believes education can bridge the gap: “It is now past the time for the investment community and its regulators to understand that the principle of educating uninterested investors about the complexities of investing is unproductive” (emphasis mine).

It went on to recommend a four-part approach “to relieve the decision making burden that has been put on investors.” Specifically,

  1. Replacing investor’s unrealistic expectations with, you guessed it, realistic expectations;
  2. “Controlling investor exposure to risk;”
  3. Monitoring investor risk tolerances; and
  4. Replacing the “mindless warning” that ‘past performance does not guarantee future results’ with probability-based market forecasts

All of which sounds a lot like education to me!

The Dalbar study has its share of critics. Harry Sit, for one, who blogs at The Finance Buff, believes the Dalbar study overstates the behavior gap. Some of the performance gap, he argues, can be explained by how the market performed during the period studied.

My two biggest take-aways from all this are:

First, whether the gap between the market’s performance and that generated by the average investor’s portfolio is 4 points or 10, and whether all of that gap or only a portion of it can be attributed to investor behavior, we investors are, in fact, often our own worst enemies. The more we decide on a trustworthy strategy that’s appropriate for our age and risk tolerance, and stay with it, the better off we will be.

Second, I couldn’t help but be disturbed by the phrase “uninterested investors.” Investing for future needs—whether funding our later years or helping our kids pay for college—is too important for people to decide they’re not interested in the topic. The solution won’t be found in making decisions for people or forced wealth redistribution. Long-term, it’ll be found largely in providing age-appropriate, engaging, practical financial teaching starting as early as age two and continuing through college, and in fostering a culture of personal responsibility.

What are your thoughts on this?

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

A little something different for the start of this holy week. The following Easter meditation appears in this month’s Sound Mind Investing newsletter. For those who are not subscribers, we thought you’d be interested in reading it as well. From our families to yours, many blessings to you especially during this important week.

The awesome beauty of nature. The innocence of childhood. The security of a world at peace. The exuberance of romantic love. The joy of living life freely and fully.

All of these are noble themes. Great literature, art, and music have all been inspired by them. They capture our emotions and imaginations. They challenge our values and influence our priorities. They reflect universal longings of the human spirit. But, although uplifting, they fall short of the noblest and greatest theme of all.

A grander theme runs through all of human history, from the instant of creation to this very moment. This theme explains why we’re here, why things happen as they do, where the world is headed, and why the world, as we know it, must eventually end. It underlies everything that is, and is the reason for everything that is not. It is the incomparable glory of our God, surely the greatest theme in all the universe!

Jesus Christ was God’s glory incarnate. His life was the glory of God on display.

“The Word became flesh and made his dwelling among us. We have seen his glory, the glory of the One and Only, who came from the Father, full of grace and truth” (John 1:14).

Jesus was “man as God intended.” This is what it means to say that Christ led a perfect life—He lived a life of total dependence, moment by moment, upon the Father. He was never the source of His own self-sufficiency. That is why God’s glory and radiance were uniquely reflected through Him.

“I tell you the truth, the Son can do nothing by himself; he can do only what he sees his Father doing, because whatever the Father does the Son also does… By myself I can do nothing; I judge only as I hear, and my judgment is just, for I seek not to please myself but him who sent me…. When you have lifted up the Son of Man, then you will know that I am the one I claim to be and that I do nothing on my own but speak just what the Father has taught me. The one who sent me is with me; he has not left me alone, for I always do what pleases him” (Various verses from the Gospel According to John).

On His own, Jesus said He could do nothing. On our own, Jesus said we can do nothing. If we will rely upon and obey Christ in the same way He relied upon and obeyed the Father, then He will be to us what His Father was to Him—an infinite source of wisdom and strength.

“I am the vine; you are the branches. If a man remains in me and I in him, he will bear much fruit; apart from me you can do nothing… If you remain in me and my words remain in you, ask whatever you wish, and it will be given you. This is to my Father’s glory, that you bear much fruit, showing yourselves to be my disciples” (John 15:5-8).

We draw strength from Jesus through His spirit who lives within us. Isn’t it astonishing that although we have no glory of our own, we can have the very glory of God living within us? It is only through His life-giving power in the believer that we are able to begin living a life pleasing to Him.

“If you love me, you will obey what I command. And I will ask the Father, and he will give you another Counselor to be with you forever—the Spirit of truth. The world cannot accept him, because it neither sees him nor knows him. But you know him, for he lives with you and will be in you….Whoever has my commands and obeys them, he is the one who loves me. He who loves me will be loved by my Father, and I too will love him and show myself to him” (John 14:15-17, 21).

The Christian life isn’t a religion; it’s a relationship. Living with Him, and getting to know Him more and more, is the essence of the Christian life. The more we know Him, the more we love Him. The more we love Him, the more we want to surrender to Him. And the more we surrender to Him, the more we become like Him. That is the nature of Christian maturity.

“Now the Lord is the Spirit, and where the Spirit of the Lord is, there is freedom. And we, who with unveiled faces all reflect the Lord’s glory, are being transformed into his likeness with ever-increasing glory, which comes from the Lord, who is the Spirit” (2 Corinthians 3:17-18).

Austin Pryor

By Austin Pryor

Austin Pryor has three decades of experience advising investors, and is the founder of the Sound Mind Investing newsletter and website. Austin lives in Louisville, Kentucky, with Susie, his wife of 46 years. Two of his sons, Andrew and Matthew, work with him at Sound Mind Investing. A third son, Tre, is a RealtorŪ in the area.

This week’s picks for the best in personal finance from around the web.

This stock market needs a correction (MarketWatch). Times like these call for expectation management and self-control.

In retirement, when do you turn over your accounts? (US News). It’s not easy to turn over the keys to your car, or to your investments.

Retirees keep one foot in workforce (CNBC). Where and how to find work if you want it in your later years.

Going back to school, without the pressure (NY Times). How Sun City is being replaced by Elder U.

Report: 85% of pensions could fail in 30 years (USA TODAY). Warning lights are flashing on public pensions.

And from the blogosphere…

Is this the beginning of a crash? (The Reformed Broker). Why one respected Wall Street watcher doesn’t think so.

Here’s the weird thing about the tumbling stock market (Business Insider). Of red numbers and head scratching.

What’s your stock market story? (Bloomberg View). “If you are looking for a clear reason as to why stocks did what they did, then you are in the wrong line of business.”

Why do investors make bad choices? (Bloomberg View). The dangers of availability bias, loss aversion, and probability neglect.

What does “storing up treasure in heaven” mean? (Christian PF). Reflecting on what Jesus might say about the American Dream.

We’d love to hear your responses to any of the above. To weigh in, just meet us in the comments section.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

For anyone with money in the market, it would be natural to feel some fear right about now. The market has been slipping, and for well over a year there’s been talk of a correction, or worse. It’s during times likes these that we need to remember who we are: Investors, not traders.

It’s analogous to—actually, an integral part of, our overarching financial identity. We’re stewards, not consumers.

Investors build a portfolio with our risk tolerance and investment timeframe in mind.

Investors think long-term.

Investors know that the path toward gain is marked by some scary losses along the way.

Investors are patient.

Investors use logic to make decisions, not emotion.

Investors choose who to listen to and who to tune out.

Investors bathe our decisions in prayer, and trust that God is with us in all things and at all times—He knows our needs and has a purpose for all that we experience.

Investors know that the pain of loss is more powerful than the pleasure of gain, which helps us keep perspective at times of pain.

In Chip and Dan Heath’s excellent book, Switch, which is about making changes in our lives, one of the most interesting points has to do with the role of identity in making good decisions. They use the example of a chemistry professor:

Imagine…you had a lucrative opportunity to consult on the toxicity study of a new drug for a big pharmaceutical company. From a consequences point of view, the decision to accept the job would be a no-brainer – the work might pay far more than your university salary. But from an identity point of view, the decision to accept the job would seem less clear-cut. You’d wonder what strings were attached, what subtle compromises you’d have to make to please the client. You’d wonder, “What would a scientist like me do in this situation?”

That question is so simple. And so helpful.

When traveling this sometimes uncomfortable path called investing, we would do well to regularly pause and ask ourselves, “What would a true investor do in this situation?”

But perhaps we need to take the question up a notch. The English writer Samuel Johnson once said, “People need to be reminded more often than they need to be instructed.”

Maybe the better question for times like these is this: “Do you remember who you are?”

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

By now, you’ve probably seen the headlines and maybe even read some of the articles about the high-frequency trading controversy. Author Michael Lewis’ new book, “Flash Boys: A Wall Street Revolt,” is causing quite a stir, at least on Wall Street.

What Is High-Frequency Trading?

With HFT, as it’s being referred to, traders using high-speed fiber optic cables buy shares of stock fractions of a second before someone else and then sell them back at a fractionally higher price. More specifically, Lewis told 60 Minutes high-frequency trading computers are “able to identify your desire” to buy a certain stock—to actually see your order—buy it before you get a chance to, and then sell it to you at a slightly higher price, sometimes just one or two pennies higher.

Bloomberg Businessweek compared it to the paycheck scam Richard Pryor’s character pulled off in “Superman III.”

How profitable is HFT? Profitable enough to motivate one company profiled by 60 Minutes to invest $300 million in a fiber optic cable that reduced stock trade times by three milliseconds. It now leases access to high-frequency traders “at $10 million a pop.”

How widespread is the practice? According to 60 Minutes, high-frequency computerized stock trading “now controls more than half the market.”

How Does High-Frequency Trading Impact Main Street?

Lewis says the victims of high-frequency trading are, “Everybody who has an investment in the stock market.”

Others aren’t so sure.

Carl Richards, perhaps better known as “The Sketch Guy” for his visual depictions of financial issues he writes about for the New York Times, says “Flash Boys” makes a mountain out of a molehill. He believes high-frequency trading may hurt short-term traders, but not long-term investors.

Even Vanguard Founder Jack Bogle, a frequent Wall Street critic, shrugged off the high-frequency trading controversy, arguing that Main Street is actually “the great beneficiary” of HFT because it lowers transaction costs.

Josh Brown, who blogs at The Reformed Broker, explained with his usual restraint why he isn’t worked up about high-frequency trading.

The bottom line is this – there have always been insiders, unscrupulous dealers and some participants with unfair advantages over others. HFT is just the latest in a long line of shenanigans and the moment you outlaw it or modify it or babysit it out of existence, there’ll be a new broad-daylight robbery format waiting right behind it.

Comforting, right?

That last perspective takes us back to the question asked in this article’s headline, “Who’s the biggest loser in the HFT drama?” My vote goes to younger investors who have already been scared off by the recession of 2008-2009.  With each of the many articles about Lewis’ book including his contention that “the stock market is rigged against the average investor,” those in the best position to benefit from the market now have one more reason to stay away.

What are your thoughts on the high-frequency trading controversy?

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.