IndyCar Racer Dan Wheldon's Tragedy And Investing

Auto Racing And Investing:

 The Tragedies Are Not Coincidences

                                                                                By: Brendan Magee

                                                                10/19/11

I have to admit right off the bat that I know hardly anything about auto racing, except that it is a very dangerous sport. Evidence to that is the tragic death of IndyCar Racer Dan Wheldon last Sunday at the Las Vegas Motor Speedway. Unfortunately, his is not the first, and in all likelihood it won’t be the last. How much sadder could it get than a 33 year old father leaving behind a wife and child?

As I was thinking about the tragedy, my focus turned to auto racing and the risks drivers take every time they engage in a race. They are in a very confined space with a lot of other cars travelling at around 200 miles per hour. Under those circumstances, it is not a coincidence that someone will eventually be hurt and even die. Under those circumstances there’s an inevitability that at some point very bad things are going to happen.

As I thought about it, I started to think about the long-term returns the majority of investors earn. The Dalbar Group has studied the results that the average stock mutual fund investor has generated. From 1989 through 2008, when U.S. Large Company Stocks did an annualized 8.34%, the average stock mutual fund investor earned just 1.87% per year. The average investor didn’t even keep pace with inflation which rose at 2.89% per year in that time frame.

So how is it that investors are doing so poorly? Is it just a coincidence or is there an inevitability to the actions they are taking. One thing the Dalbar Study showed was that the average investor kept their portfolios intact for just three years. Within a three year period of time some changes were being made. Even though everyone has been told that stocks are a long-term investment, investors can’t seem to give their portfolios the time they need to capture market rates of return. What is it that investors are doing with the changes? The study showed that they are selling out of underperforming investments and buying investments that had better performance. Hence, they are buying high after having sold low. You do that enough and your returns are going to suffer.

Another thing that is taking place is that the activities of gambling have been confused with prudent investing. The expected rate of return on gambling is zero. Engage in gambling enough and your returns will be less than zero. That is because in the world of investing the more trading (gambling) that an investor does there are more and more charges assessed, charges that come right out of your investable assets. Now, you may not be actively participating in the trading. Your mutual fund manager might be doing it in the fund you’ve invested in. The average mutual fund trades 100% of their fund’s stocks over the course of a year. That’s a portfolios worth of commissions and all the other costs that go along with it, as well as all of those opportunities to be wrong  about the future.  If an investor engages in activities that require consistently predicting the future and returns are going to suffer.

The real mystery here is why are investors so shocked and upset when their investments haven’t performed at a sufficient level. If you stuck your hand on a lit candle there’s no mystery as to why your hand hurts. Do enough of the wrong things in investing and returns are going to be disappointing.

Brendan Magee is the founder and president of Inevitable Wealth Coaching in Drexel Hill, Pa. With questions or comments call 610-446-4322 0r send an e-mail to Brendan@coachgee.com.