Saturday 2 May 2009

Compounded Effects of Market Underperformance

Compounded Effects of Market Underperformance

Beating the market with even slightly higher rates of return is a shorter path to wealth. This is especially true if the investments are left on the table to perform, and perform consistently, over time.

What about investments achieving less than market average return?

What happens when you cling to these investments?

Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?

From an investment perspective, yes.

Click to view:
http://spreadsheets.google.com/pub?key=r59JmWu8jkHxD7HKgWcvKUA

The table illustrates that it isn't hard to show what happens when you hang on to the losers, or even the inferior "winners."

Compared to market returns of 10%, an investor underperforming the market by 2% (or achieving an 8% return) falls 7% behind a market performer after 10 years, 31% behind over 20 years, and 42% behind over 30 years. An investor underperforming by 6%, loses 43 %, 67%, and 81% to the market performing investor over 10, 20, and 30 years respectively.

That's quite a price to pay for underperformance.

Now, if your investments are producing negative returns, the results can be quite ugly indeed.

LESSON in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose out on opportunities to gain. If it's broke, fix it!

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