Here’s a cold hard truth… most investors are terrible investors.

The vast majority of investors are more like speculators. They won’t make much in their brokerage accounts this year (or next).

Think I’m being a little harsh? I realize this might anger some of you. But it’s an unfortunate fact. Here’s the proof…

This fact that gets highlighted every year when Dalbar, a company that studies investor behavior and analyzes market returns, publishes its annual Quantitative Analysis of Investors Behavior report, or QAIB for short.

This has been the nation’s leading study on investor behavior for the past 30 years or so. Inside, it sheds light on investor performance in equity mutual funds. And each year, it finds pretty much the same thing. (Hint: it’s not great.)

A History Of Underperformance

Last year, the study found that the average equity fund investor lost 21.7%. That is over one fifth of their account. And the S&P 500, meanwhile, lost only 18.11%. That’s an underperformance of more than 3%.

And if you think this is an anomaly during a down year for the market, think again. It’s actually one of the narrower gaps on record.

In fact over the last 30 years, the average equity fund investor has underperformed the market by an annualized 2.84%.

Some might think that a that this is just splitting hairs. But in reality, that’s a massive chunk of change that investors are missing out on over time. Just take a look at what that underperformance translates into when looking at the potential growth of $100,000…

_{Source: Dalbar, Index Fund Advisors}

As you can see, the average equity fund investor is losing out on nearly $864,000 dollars over time if they simply parked their money in the S&P. According to Dalbar, the biggest culprit of this underperformance is simply their behavior. The report shows that people are more often than not their own worst enemies when it comes to investing.

In fact, I’ll give you an example…

What To Do When Traders Get Tested…

Last year, over at Maximum Profit, we were heavily bullish on the energy sector. Since January, I told readers to load up on oil & gas stocks and offered picks. Every single one of those picks were up big in six months or less.

Of course, it didn’t take a rocket scientist to pinpoint those trades. All it took was a willingness to jump in. But this Dalbar study demonstrates something I’ve been saying for years about the energy sector (or any sector with big-time momentum)… Don’t expect the ride to last forever.

It might feel great in the moment. But rest assured, the bust will happen and that’s when our mettle will be tested.

It will be difficult. Our emotions will play tricks on us, leaving us wanting to hold out in case the stock gets back to its previous high so we can sell at the very tippy top. Unfortunately, that’s not how it ever works out.

We’ve all watched losers swell into bigger losers, and we’ve all watched big gains quickly evaporate. Kicking ourselves for ignoring our sell signals. Just know that the ability to stick to the trade plan is what separates the average investor that underperforms and the investor that continually builds wealth and beats the market.

Closing Thoughts

This study reinforces my strong belief that the code to “cracking” the market is working towards understanding your own psychology — the emotions that flood through your head when a trade goes against you, or you’re sitting on hefty profits.

This is why I pound the table on risk management, cutting losses short, and studying investor behavior. Because I know that if you plan your trade and trade your plan you will greatly improve your investment results.

Here’s what I want you to understand… We are not marrying the trades we make. Therefore, we shouldn’t get emotionally attached. They are simply ticker symbols in our accounts to help us build wealth. When it’s time to let one (or more) go, there should be no hesitation.

Don’t settle on being average… it could cost you hundreds of thousands of dollars over time.

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