The stock market has averaged compound total returns of about 9% a year over the last 100+ years.

This means a doubling of your money about every 8 years.

When your money doubles every 8 years on average you will eventually become very wealthy. And that’s only if you match the market returns. Surely, some investors should beat this ‘average’ return by a substantial amount.

So why aren’t there more rich and ultra-rich investors if it really is that easy?

The Sad Truth

The sad truth is, it is not that easy. On paper, investing is very simple. But we don’t live on paper.

Real-life investors (unless you are a robot, that is you) greatly underperform the market.

Case-in-point: Over the last 20 years, the S&P 500 has averaged 9.2% annual returns. Individual investors have averaged returns of 5.0% a year over the same time period according to the 2014 DALBAR QAIB Study.

There is no reason at all individual investors should greatly underperform the market – but they are.

The Most Important Investing Risk Is You

The reason individual investors fail to beat – or even match – the market is because we fail to follow a consistent strategy when times get tough.

Simply put, we panic.

We have been in a strong bull market for much of the last 6 years. It’s easy to be a great investor during bull markets. A rising tide lifts all swimmers, after all.  But…

“It’s only when the tide goes out that you discover who has been swimming naked”

– Warren Buffett

Bear markets, panics, and market crashes are what destroys individual investment returns. When the market tide retreats, don’t get caught without your swimming suit.

It’s not the paper losses that are what destroys individual investor returns… The S&P 500 experiences those as well, and average returns for the S&P 500 are 4.2 percentage points higher than average investor returns.

What destroys investor returns is panic selling.

You see that ‘amazing’ stock you bought go down 30%, 40%, 50%, or more, and think “this was a terrible investment! Time to sell before it goes down to 0”.

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