Chas Craig, BridgeTower Media Newswires
If we pursue our objectives with the strength of our convictions, we shall eventually approach our ideal, a nation of small share owners, a nation in whose material wealth every citizen has vested interest through personal ownership, a nation which is truly a people’s democracy.
– New York Stock Exchange President Keith Funston in 1951
In this space last fall in a piece entitled “Overconfidence – What You Don’t Know Can Hurt You” we cited a Gallup survey of investors that revealed that when asked to estimate the return for the overall stock market and the return on their own portfolios, respondents on average thought they were consistently beating the market by 1 to 2 percentage points. Below is an excerpt from the prior piece that provides my thoughts on the survey.
“While it is possible that Gallup stumbled upon an anomalistic group of superior investors, I would put my money on them suffering from excessive self-regard. The reality is that while beating the market can be done, most professionals struggle to do so on a consistent basis (partially owing to fees), and the studies of individual investors’ returns invariably show that, on average, individuals are poor investors.”
To provide a data point for the scandalously poor investment results achieved by the American public I cited a 2013 study conducted by American Funds entitled “The Active Advantage,” which found that investors in an S&P 500 index fund on average only earned a little better than half the return of the fund itself over the preceding 15 years because of buying high and selling low. Since last fall I came across a more comprehensive study conducted by J.P. Morgan Asset Management that was featured in a presentation created by CFA Society of Boston as part of their effort to help increase financial literacy. The study showed the following for the 1995-2014 period: (1) U.S. stocks as measured by the S&P 500 generated an annualized return of 9.9 percent, (2) A balanced portfolio of 60 percent U.S. stocks and 40 percent U.S. bonds provided a return of 8.7 percent and (3) The average investor earned a return of just 2.5 percent.
The return shown for the average investor is obviously quite bad on a relative basis. However, it is important to note that the study came to this figure using only mutual fund transaction data for retail investors. At least in these instances investors were buying and selling diversified baskets of securities. Point being, while the data to perform a comprehensive study might not exist, a full accounting of individual investors’ investment results, including operations in individual stocks, not to mention “pot of gold at the end of the rainbow” investment schemes, might very well show that the average American investor earns a near 0 percent or worse return over long periods.
Of course, the average investor’s inability to harness “The Power of Compounding Interest” is a major societal problem now. With defined benefit pensions (where investment risk is borne by the employer) increasingly being replaced by defined contribution plans (where investment risk is borne by the employee), such as 401(k) plans, individuals’ investment decisions are increasingly more important. To this point, an article in the June 23-24, 2018 edition of The Wall Street Journal by Heather Gillers, Anne Tergesen and Leslie Scism entitled “Time Bomb Looms for Aging America” cited data from the Center for Retirement Research showing the percentage of households 50-59 years old estimated to have less savings for retirement than they need to maintain their current lifestyles.
The “at risk” percentage dipped from 35 percent in 2004 to about 32 percent in 2007 during the bull market that pre-dated the Financial Crisis. As you would expect, the figure spiked as stock markets declined at the end of the last decade. However, the figure did not top out until 2013 at 45 percent before declining a touch by 2016 (latest available data). No doubt, there are many variables at play in this data set, but chief among them is that many investors sold out of risky assets such as stocks near the market bottom and largely sat out the upturn. Point being, while the “at risk” percentage has likely declined a little bit over the past 18 months along with higher stock market values, this a problem, and it is likely to get worse with each market cycle if unaddressed. There is little doubt in my mind that there would be less mistrust of our capitalist system, less populism in our politics if individuals simply earned reasonable rates of return on their financial portfolios.
Getting back to our opening quote, I imagine if Mr. Funston would be pleased with the democratization of investment since the mid-20th century. Per Investment: A History by Norton Reamer and Jesse Downing, 1 in 2.5 U.S. adults held stock directly or indirectly in the early-2000s, up from 1 in 16 in 1952, 1 in 5 in 1980 and 1 in 4 in 1990. However, I think he would be horrified by the counterbalancing lack of financial literacy in our society.
I recently asked a university finance professor if there was an opportunity to get a personal finance course to be a part of the required general curriculum to help address the issue discussed in this column. He told me such a thing had recently been attempted and failed, with one administrator seriously stating to him that doing so would be “too practical.”
Too practical? How could such a thing be said out loud? We desperately need more serious, practical people. Teaching financial literacy in our public universities and high schools seems an obvious first step in that direction.
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Chas Craig is president of Meliora Capital in Tulsa (www. melcapital.com).
