It’s because of two mistakes that retail investors make—one is trying to time the market and the other is chasing the performance of a manager. The retail investor performance in mutual funds is 600 basis points lower—six percentage points lower—than the mutual fund itself.
Thomas Brown, Second Curve Capital, Bloomberg Surveillance, 21 February 2012.
Robert Kirby, late of The Capital Guardian Trust, suggested eons ago that the goal was to beat the market by two percentage points per year (move the decimal point two units to the right and you have 200 basis points.)
You do the math.
You hit the ball out of the park, over the Monster and the Cask’n Flagon (pitchers and catchers!)
Start at Mr. Kirby’s nirvana less 200 bps. to the S&P 500 less another 400 bps. because you bought when comfortable and did not buy when of a fear generated by yourself, your father-in-law, and/or some yahoo guest on Bloomberg Surveillance.
Then overlay a possible new-normal total return that is say 8% gross return and not 12% from another time and place.
8 less 2 = 6 less 4 = 2
A 2% NOMINAL return. With inflation in the vicinity of 3%, you enjoy a Tom Brown adjusted -1% return. (See present Congress for future tax treatment.)
Stop timing the markets. There is a John Henry and Fenway Park of research that suggests timing is…difficult. Stop chasing one- and three-year performance.
Start with cash flow. Start with the study of a good business. And, lose the Dow 13,000 media hysteria. Discuss.