If you’re the average investor, you’re below average. According to the Dalbar Quantitative Analysis of Investor behavior, over the last 20 years, investors under-performed the markets by a whopping -4.66% annually. That’s an alpha of -4.66% compounded annually. Investors seeking alpha failed to find it. Here at DIY.Fund, we believe that investors with a long term investing timeline may achieve alpha. However, most investors seek alpha in the wrong places. These are three places you should not look if you’re seeking to outperfrom a benchmark.
At your Registered Investment Adviser’s Office
If you have a decent registered investment adviser, they did not promise to outperform the market. If your RIA promised to outperform the market, they lied. Nobody can guarantee outsized returns. This isn’t to say that financial advisers offer no value. Rather, financial advisers offer “behavioral alpha.” They keep you calm, and help you to achieve parity with the markets. If you can’t trust yourself with your investments, a financial adviser may be worth the 1-2% in fees that you pay every year.
However, don’t misunderstand why you’re paying an adviser. Advisers don’t give you outsized returns. They will give you the tools and wisdom you need to practice self-control during times of negative volatility. For some investors this can offer huge financial upside, but not Alpha. If you trust yourself to make good decisions during bad times, then we want to give you the tools you need to make your own investing decisions instead of relying on an adviser to invest for you.
On CNBC (And Elsewhere in the Financial Media)
“BUY! SELL! BUY! SELL!” The financial media doesn’t just have talking heads, they have screaming heads. Even the most trivial dip or bump in the markets sets off new speculations and new recommendations that fit a narrative that sells advertising space. Don’t be fooled, the financial media isn’t offering an opportunity for alpha. At best they offer some information on important mergers, acquisitions and IPOs, but more often they try to pass off patently obvious statements as news (Don’t believe me- check out this article that says that people who picked the right stocks outperformed the market).
CNBC and other Financial Media Outlets don’t offer the insights that investors need to make disciplined investing decisions that fit with their investment strategy. If you’re a DIY investor who wants to outperform the market, don’t look to the financial media to help.
In Products You Don’t Understand
You may achieve alpha through derivative products, but if you don’t understand what you’re buying you’re more likely to lose money to fees. Even for investors seeking alpha, confusing high-cost products aren’t likely to help them achieve it. If you can’t explain why your investments give you an edge over the benchmark, you probably won’t see alpha.
Look to your investing advantage
If you want to outperform the market in the long run, you need to understand and maximize your personal investing advantage. At DIY Fund, we give you the tools to measure your strategy, contextualize positions you may buy or sell, and to evaluate whether you’ve achieved alpha or not. A well informed investor who doesn’t panic during market dips, and doesn’t change strategy at every whim may achieve alpha.