Just recently my friend Cullen Roche wrote a great piece entitled “Can we All Agree to Stop Comparing Everything to the S&P 500″ in which he stated:
“Benchmarking is a pernicious thing in financial circles. Â Not only because it disconnects the way the client and a fund manager understand the concept of ‘risk’, but also because the concept of benchmarking seems to be misunderstood.”
Risk is rarely understood by investors until it is generally too late. Take, for example, a call I received the other night during a broadcast of the “Lance Roberts Show.”  The caller didn’t understand why people didn’t just buy an S&P 500 index and then just leave it alone. When I asked him when he started investing he proudly stated that he had been investing for the almost 5 years and had more than doubled his money. The problem is that this particular individual has no functional idea of what “risk” entails.
The chart below is an inflation adjusted return of $100,000 investment in the S&P 500 from 1990 to present. The reason that 1990 is important is because that is when roughly 80% of all investors today begin investing. Roughly 80% of those began after 1995. If you don’t believe me, go ask 10 random people when they started investing in the financial markets and you will likely be surprised by what you find.
As shown, there is certainly a case to be made for buying and holding an index. However, it is quite clear that “buying low” and “selling high” would have been much more beneficial from 2000 until present.
Unfortunately, the reality is that investors rarely do what is “logical” but react “emotionally” to makret swings. When stock prices are rising instead of questioning when to “sell” they lured in near market peaks. The reverse happens as prices fall leading first to “paralysis” and“hope” that losses will soon be recovered. Eventually, near market bottoms the emotional strain is too great and investors “dump” shares at any price to preserve what capital they have left. Despite the media’s commentary that “if an investor had ‘bought’ the bottom of the market…” the reality is that few, if any, actually did.  The biggest drag on investor performance over time is allowing “emotions” to dictate investment decisions. This is shown in the 2013 Dalbar Investor Study which showed “psychological factors” accounted for between 45-55% of underperformance. From the study:
