One of the big reasons many individual investors underperform the market averages is because they have unrealistic expectations regarding expected returns.
This chart I highlighted on my weekly video/podcast this week shocked me if it is in fact true.
What this graphic is showing is that US investors expect an average annual investment return of 17.5% a year.
This is wildly higher than the average return that stocks have provided over the previous decades. The average return of stocks, with dividends re-invested, is only around 9% per year.
The greatest investor in the world Warren Buffett has averaged 20% per year. Does the average investor think he or she is on par with Buffett? Short answer they are not.
I believe that these expectations have been set due to this current period of easy money that we have experienced.
The FED and other central banks have flooded the system with liquidity and brought interest rates down to zero or below zero if you factor in inflation.
This has created a series of rotating bubbles which has enriched people that have been lucky to be in the right place at the right time.
If you live in CA. and your house has appreciated to over a million dollars does that make you a great investor? Or were you lucky to be in the right place at the right time.
If you bought a crap coin and it went up several hundred percent in a month are you a great investor? Maybe, but more than likely you were lucky.
My experience and financial history show that this period of easy money will eventually end. All of the malinvestment, bubbles, and easy profits will evaporate like a puddle of rainwater on a hot summer day.
A generation of investors will be crushed and swear off investing for the rest of their lives. This will be unfortunate.
The way to consistently make returns in the market is to sell overvaluation and buy undervaluation.
Very easy to understand yet very difficult to implement.
Value investing is currently not sexy or fashionable but history shows that buying cheap assets and waiting for them to inflect and reprice has been a winning formula.
Assess your investing skills and understand historical returns on various asset classes. You will then be able to discern when the crowd is way out of touch with investing reality.