According to the new Quantitative Analysis of Investor Behavior (QAIB) from mutual fund industry consulting firm DALBAR, the average mutual fund investor actually underperformed the market over the last 20 years – by a whopping 7.4 percent per year.
Combined with the typical and customary (but still high) expenses mutual fund investors typically pay out to Wall Street money managers, that’s enough to slash their overall investment returns by half.
Since the QAIB’s inception in 1984, the S&P 500 has generated returns of 11.11 percent, annualized. But when you just look at the cash-flow-adjusted returns of the individual shareholder, mutual fund investors concentrating in stock funds have only generated 3.69 percent. That’s less than 1 percentage point above inflation (2.8 percent over the same time period).
Investors in asset allocation and fixed income funds did even worse, with actual cash-flow-adjusted returns of 1.85 and 0.7 percent, respectively.
According to DALBAR’s data, the average investor in mutual funds trailed the index over the trailing 12 month, 3 year, 5 year and 10 year time period.
Why is this? Because the average investor tends to be bullish when stocks are about to fall, and bearish when they are about to rise. ‘Twas ever thus, and probably always will be.
Furthermore, the tyranny of the mutual fund expense ratio works against the investor in bull and bear markets alike.
One way to break the cycle: Get out of it.
Using a Self-Directed IRA or other retirement account can help you sidestep not only the unreasonably high fee structures of many retail mutual funds, with expense ratios exceeding 1 percent. Depending on what you do with your IRA, self-direction can help you ignore the day-to-day gyrations of the stock market and all the media hype, and allow you to focus on what matters most: The long-term returns of your retirement investments at reasonable levels of risk.
Few Americans have the discipline to ignore the daily dose of alternating mania or melancholy from the financial media. If it were that easy to ignore the noise, you wouldn’t have these huge disparities between the theoretical return of the broad stock market indices and the actual returns experienced by investors after adjusting for their jumping in and out of the stock market at bad times.
Making the quantum leap to Self-Directed IRAs can help you declare independence from the mob, because self-direction allows you to invest in things that are grossly under-covered by the mass financial media. For example, Self-Directed IRAs, 401(k)s, SEPs, SIMPLEs, Roth IRAs and other accounts let you put your assets in investments you may know much more about than any TV reporter:
- Private equity
- Private lending
- Rental real estate
- Land banking
- Commercial property
- Tax liens and certificates
- Farms, ranches and livestock
- Private businesses, partnerships and LLCs
- Precious metals (with some restrictions)
- And much more.
The only investments the IRS places off limits to self-directed retirement accounts are life insurance, alcoholic beverages, art and collectibles, jewelry, gemstones and certain forms of precious metals, chiefly because of inconsistent or uncertain purity standards.
The IRS also prohibits buying or selling from yourself or lending to or borrowing from yourself, or directing your IRA to do business with a spouse, ascendant or descendant, or any of their spouses.
Who does it work for?
Self-Directed IRAs or other retirement accounts may be a realistic and effective option for you under any of these circumstances:
- You are not satisfied by interest rates or expected rates of returns in mutual funds
- You have professional-level expertise or other market advantage in a given investment or asset class
- You want to diversify your retirement account
- You understand real estate and believe you can be a better real estate investor than fund-picker
- You have the risk tolerance and time horizon to withstand lower liquidity and/or more short-term volatility
- You want to reinvest your returns in your assets rather than ship them off to Wall Street in the form of expense ratios. American IRA only charges a reasonable flat rate for services, as opposed to a high percentage that compounds over time. However, you will have to manage your internal expenses within your Self-Directed IRA or other retirement account.
- You understand the risks
Want to know more?
Join us for a free, no obligation Webinar and tutorial entitled Getting Started with Self-Directed IRAs. Just click on the event you’re interested in, sign up, log in and learn. There’s no obligation, no fee.
Or, alternatively, give us a call at 866-7500-IRA(472).
We look forward to getting to know you.