Here are five reasons why your investment strategy may not have performed like you thought it would.
1. Your internal expenses were too high. One of the biggest detractors of performance is high fees, which could come in the form of mutual fund fees. When speaking about mutual fund fees, many people are unaware of the internal expenses of the funds because the fees are “invisible,” meaning there is typically no line item on your statement that shows what your mutual fund fees were in a given period.
However, mutual fund fees are certainly there. They are deducted from the performance of your fund, which is money that could have been yours. Mutual funds that have higher expense ratios tend to be those that trade more actively, or more often. On the other hand, index funds are typically some of the lowest-cost funds out there. It’s possible that a fund with higher fees might have a good track record of outperforming the index, but it’s also possible that you may have paid a higher fee for an equal or lower rate of return.
However, not all fees are bad. By paying mutual fund fees, it allows you to gain broad diversification without requiring a large portfolio size. The key takeaway here: Be sure to do your best to limit the fees you pay, and this should help your long-term performance.
2. You exhibited poor behavior. It may be a tough pill to swallow but, in some cases, you may have been a main factor in your own underperformance by exhibiting poor investment behavior. What is poor investment behavior? It’s when you do the opposite of the old phrase “buy low, sell high” and you “buy high, sell low.”
Truthfully, it may have happened because you were trying to correctly time the market. In doing so, maybe you spent some time invested and some time on the sidelines. While your intentions were good, you likely missed some of the big positive days and, inevitably, you sold after experiencing some big down days.
Here’s the thing about market timing: Nobody has a crystal ball. Even the most intelligent minds in the world have not found a way to consistently time the market successfully and for extended periods of time. It’s incredibly difficult, if not impossible, to do. Yet, investors continue to try to do so at the cost of their own portfolios.
3. You didn’t compare apples to apples. In my view, one of the most common reasons that investors do not realize the rate of return they were expecting is because they are not evaluating their portfolios correctly. For example, let’s imagine an investor named Bob, who has a balanced and diversified portfolio built of 60 percent stocks, 40 percent bonds. Let’s also assume that the stock and bond portions of the portfolio are built using mutual funds, which hold hundreds or thousands of individual securities.
However, Bob tends to closely monitor and watch the Dow. And he is perplexed when it rises by over 300 points in a day and his portfolio barely moves. Or, Bob might cite something like the Dow being up by 10 percent over the last 12 months, but his portfolio was only up 6 percent (hypothetically).
In this case, Bob is comparing his portfolio, made up of only 60 percent stocks, to the Dow, which is made up of 100 percent stocks. Bob doesn’t realize that his portfolio is broadly diversified in stocks representing all parts of the world, while the Dow is made up of only 30 U.S. stocks. Had Bob’s portfolio been invested in 100 percent U.S. stocks, his comparison to the Dow would be more accurate. But with a 60/40 mix, he’s just not comparing apples to apples. If you feel your investment strategy didn’t work, it’s possible you’ve unknowingly made a similar faux pas.