You know how costs, fees and taxes impact your returns. Not too long ago, an acquaintance was bragging about what a great year he was having. And truth be told, his gross returns were impressive.
Then I had him calculate his net returns. Once he figured in his turnover, commissions and especially taxes, he realized he had an enormous cost structure that ate into his P&L. After all costs, his great gross returns turned into below-market returns.
I informed him, “My retired 75-year-old mom bought an S&P 500 index last January, paid an $8 commission and forgot about it for the year. She kicked your professional butt.” He was not happy about that.
Perhaps we need a corollary rule about active trading: Gross returns don’t count, net returns do.
You can pick fund managers. Yes, we all know who the great fund managers of the past 20 years were, but that’s after the fact. What makes you think you have the skill set to evaluate the best ones of the next 10 to 20 years — their investing approach, discipline, character and ability to express their investing thesis?
Only 1 percent of fund managers actually earn their fees: Why do you believe that you can pick them out?
You understand mean reversion. Every year, it seems, some fund manager gets the hot hand and becomes a media darling. He attracts lots of assets as investors chase past performance. The size of his fund balloons. Then the disappointments come.
Here’s why. Outperformance is often random among the 20 percent who manage to do better than their benchmark each year. But it’s always a different 20 percent. Following that run of good fortune, they typically follow with a subpar year, as their chosen style or sector cools off — it reverts to the mean, or average. (Math is a cruel mistress.)
You have a plan. I am constantly astonished at how few people actually have any sort of long-term plan other than throwing some money into a 401(k) or IRA and hoping for the best.
You can pick stocks. Let’s be brutally honest about this: Discussing specific stocks during a bull market is loads of fun. Chatting about new products, management and exciting new technologies makes for great cocktail party chatter.
The problem is that most of you lack the specific skill set to do this well. This includes understanding valuations, recognizing problems early and, perhaps most of all, following your discipline to limit losses when things don’t work out.
Most investors are better off owning a set of broad indexes for their main retirement accounts.
You are saving enough for retirement. I’ll spare you the lecture, but for most of you this is not true.
The average retirement account held by 60 percent of Americans is less than $25,000 (according to the Employee Benefit Research Institute). The average 401(k) is $77,300 (Fidelity). According to EBRI, only 14 percent of American workers are very confident they will have enough money to live comfortably in retirement.
This has been a short list. As Mark Twain wrote: “Everybody lies — every day; every hour; awake; asleep; in his dreams; in his joy; in his mourning.”
What are you lying to yourself about?