Every study I have ever read comparing individual portfolio returns to the market always says the same thing regardless of who performs it. Individual portfolios in the market, “on average,” never perform as well as the market itself. The data on this subject is very compelling, sound, and difficult to dispute. So, what can you do to make sure your portfolio isn’t underperforming the market?”
There are numerous mistakes in portfolio design that both individual investors and even professional portfolio managers make that contribute to this underperformance. I will address several of them later this year in this column; however, one of the biggest causes of individual investor underperformance is not an error in portfolio design at all. It is a failure to maintain ones investment objectives in the face of emotional delusion. And the number one cause of an investor’s emotional delusion is the media “mirage.”
First, I should define what I mean by an emotional delusion. It is a feeling or emotion one has that is not based in fact. It’s like the reality an addict on PCP has when he thinks he can fly off of a building. Everything he is experiencing is telling him he can fly, but the reality is the ground is hard, it’s a long way down, and the sudden stop will kill him. In the same way, the media can create the illusion that the market will never have another downturn. In the late 1990’s, this was certainly the case. Similarly, the media can make you believe your portfolio is on the next Titanic, and as your portfolio life raft hits the water, your ship sails away without you.
Mark my words, you have been warned! Do not utilize the media as an indicator of economic or market conditions. In fact, I recommend that you not base your portfolio design on current economic and market conditions in the first place (Again that’s another topic). The media has an “axe to grind,” and it is called profit. The media profits through advertising, and advertisers have an interest in gaining the most exposure. So if the media, including the market news and investment magazines, can get more exposure they will make more money. And, what sells? Car wrecks, crying widows, market panic, and crystal ball type insight about what to do with your money. This is where the web of investment losses begins.
With top fund picks and daily market reports you are continually sucked in. Enron executives were sentenced today. The Fed raised interest rates. Oil climbed over $60 a barrel. Corn futures fell. Unemployment is on the rise. How do retail sales look? Is the Dow up? Is the Dow down? How did my investments do today? Adrian, what do you suggest? My suggestion . . . Get off the media’s hallucinogenic drugs, and then we can talk!