About 2 years ago we presented research that showed that advisors can add as much as 3% per year when compared to the investment returns that most retail investors experience on their own. The report, first introduced by Vanguard Advisors, the Index Mutual Fund company, offered a compelling model to help the typical investor improve returns. Vanguard Advisors updated their research and once again concluded that advisors when acting appropriately, can significantly add value compared to the typical retail investor.
A key issue is that Investors often make choices that destroy investment returns and jeopardize their ability to meet their long-term goals. Essentially, the typical investor, as demonstrated by flows in and out of mutual funds, trails the returns of the market, and often the very funds that they are invested in. According to a study by Morningstar, the mutual fund rating company, for the ten years, ending December 31, 2015, mutual fund investors trailed the funds they were invested in by .86% to 2.29% per year.
Many investors destroy returns by chasing returns, buying and selling at the wrong time. Some are locked in the fear and greed cycle that dominates the news cycle. Some are enticed by advertisements of mutual fund companies touting their outperformance. Others have a habit of moving their investments to the funds that have most recently performed the best, a strategy that often results in ‘buying high’ and ‘selling low’, creating a cycle of underperforming the market.
Therefore, one of the key ways that advisors add value is by creating a strategy to help investors avoid the trap of buying and selling at the wrong time. This “Professional Stewardship” is central to how advisors add value and begins with having a specific plan and investment strategy. Having a plan gives investors confidence to stay the course during market disruptions, a confidence that can be of significant value during times of stress.
Of course, At Cedarstone Advisors we are proud of the value that we create for our clients. There are many studies that show the gap between market returns and investor returns, and we are committed to helping our clients avoid the pitfalls that so many experience. If you are worried that your investments are not in the best strategy, please give us a call. We would be glad to help you as well.
Benyhoff, Donald. "Vanguard Advisors Alpha" Vanguard. June 2016 http://www.vanguard.com/pdf/ISGAA.pdf