Investors, Are You Swinging A Dull Axe?

Investors, Are You Swinging A Dull Axe?

by Brendan Magee

What if you were a lumberjack and (sorry environmentalists) your livelihood depended on the amount of trees you were able to cut down? Take the case that you, being an able bodied individual found a job with a lumber company and every day you went to work they supplied you with your axe. What would be the impact on your ability to provide for your family, and what would be the toll on you personally if you went to work every day with a dull axe? How would you feel if you found out the lumber company was intentionally giving you a dull axe?

With that dull axe, could you still cut down trees and earn a living? Absolutely!  Could you cut down as many trees as you could if every day you were making use of an axe that was sharpened properly? No! Would your shoulders, back, arms, and hands take a bigger pounding with that dull axe? Absolutely! So you will most likely have to work harder and longer hours to meet your quota, and you could miss some quality family time. Maybe as a result of swinging the dull axe you can't work as long or be forced to retire earlier and not make as much as you would have with a sharpened axe. Inconveniences? Yes. Tragedies? No

So would using a dull axe be the biggest tragedy of your life? Absolutely not! The dull axe just puts reduces the possibilities that you and your family get to experience. Some may say that is a tragedy others wouldn't look at it so pessimistically.

As a coach I think I sometimes over inflate the amount of hardship an investor who uses imprudent investing strategies will endure as a result of using investing's equivalent of a dull axe- stock picking, market timing, and track record investing.

If you use these strategies to invest your money will you make money? Absolutely! Studies show that investor who do you use these strategies do make money. *The average stock fund investor over the past 20 years or so did around an annualized five percent. Some did a little, better some did a little worse, but there is no denying they made money. They just didn't make as much as they would have if they would have thrown away the dull axe and eliminated any and all stock picking, market timing, and track record investing. If they did, those stock fund investors in U.S. Large Company Stocks would have done an annualized 11.11%. (Past returns in no way indicate their performance in the future)

So at 5% you made money. It's just that you most likely will have to work a little longer to retire or you are going to have to cut out some unnecessary luxuries to be able to put more money into your 401k or IRA to make up for the lack of return.

You may just say the hell with it. I'm retiring at a certain age no matter how much I have and just cut out a few of the goals you and the wife had set out to achieve. Is working longer, harder hours a tragedy? Absolutely not! Is not taking the trip you always planned a tragedy? Absolutely not! Is having to put in more hours at work away from the family a tragedy? (Maybe according to the wife she would prefer it that way.) No! There are far greater tragedies that a person could experience than these.

It's just that there are consequences to every action. You have to be the one to say what you are willing to give up or endure. Unfortunately, a lot of investors are unaware that they are swinging a dull axe. All they know is that the returns they were expecting just aren't there. The amount of money they expected to be seeing in their retirement accounts is a fraction of what they were hoping for at this point in their lives.

Even sadder is when they make a change they still can't see that they have picked up another dull axe. Even worse is that in most cases, be it through a financial planner or over the internet on their own, the investment industry is handing the investor the another re-fried version of a dull axe.

Here's the bottom line. If you do not have peace of mind with your money and investments and what you are experiencing is confusion, disappointment, and resignation consider that you are swinging a dull axe. There are ways to find out. Focus on the right questions and if you cannot answer them, you are no doubt swinging a dull axe. Put it down and never pick it up again. Swing with the axe that makes your life the easiest.


Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions and comments e-mail brendan@coachgee.com or call 610-446-4322   

-Source of returns data is the Dalbar Corpaoratiojns "Quantitative Analysis of Investor Behavior for 2014."