“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett

The stock market provides one of the most reliable avenues available for generating wealth. The key is to build an appropriately diversified portfolio and then hold it long enough to tap into the power of compounding returns. Doing this seems like it should be easy, yet it repeatedly proves to be an extremely difficult task for many. A major challenge is that this process takes time and lots of it.

Time is one of the few advantages that individual investors hold over the professionals. If an individual’s investment strategy is out of favor, they have the luxury of patiently waiting for it to come back. Many of the pros do not have this ability. They have benchmarks to beat, boardrooms to satisfy, and clients to attract. A hedge fund manager faces significant career risk if poor performance pushes their clients out the door.

Unfortunately, this advantage is squandered by many investors. There is nothing sexy about a low-cost, diversified portfolio. It is a slow and boring way to build wealth. Day-trading, on the other hand, is exciting and comes with the promise of big gains in little time. Unfortunately, study after study shows this is not the path to success. One such analysis has been conducted by Dalbar inc, whose most recent results are illustrated below.

The study demonstrated that the average fund investor underperformed the funds they invested in, largely due to performance chasing and poor market timing. Investor money flows into the funds and asset classes with the best returns. This often happens as the newly popular investment’s performance is peaking and heading towards a period of underperformance. When this occurs, investor money flows into the new market leaders, and the process repeats itself. Consequently, the investor return (orange bar) of 2.5% is considerably lower than the options they were bouncing between.

Source: J.P. Morgan Asset Management, Guide to the Markets. Source: Barclays, Bloomberg, FactSet, Standard & Poor’s, J.P. Morgan Asset Management; (Bottom) Dalbar Inc, MSCI, NAREIT, Russell. Indices used are as follows: REITs: NAREIT Equity REIT Index, Small cap: Russell 2000, EM Equity: MSCI EM, DM Equity: MSCI EAFE, Commodity: Bloomberg Commodity Index, High Yield: Bloomberg Barclays Global HY Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Cash: Bloomberg Barclays 1-3m Treasury, Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/19 to match Dalbar’s most recent analysis. Guide to the Markets – U.S. Data are as of December 31, 2020

Last month, a pair of researchers added to the literature with a study that looked at the volatility experienced by investors (1). Their findings were similar to that of the Dalbar study above. Specifically, the volatility investors experience is typically higher than the volatility of the investments they allocate to (by a factor of 10 to 75%).  The study noted: “Additional tests reveal that investor propensity to chase stability is the principal driver of this volatility differential.” The authors concluded their paper saying, “On the investor behavior side, the findings of this study are another argument for investing styles that minimize trading, and avoid timing the market.”


  1. Investors that try to improve their return by picking stocks or timing their rotation between asset classes typically end up with lower returns.
  2. Investors that try to avoid volatility (chase stability) end up increasing the volatility of their returns.

In an attempt to earn above average-returns, many investors wind up earning below-average returns. Even worse, they must contend with higher volatility in the process. The holder of a low cost and diversified portfolio has little hope of beating the market. With some patience and discipline, beating the average investor seems to be within reach.

1. Dichev, Ilia D. and Zheng, Xin, The Volatility of Stock Investor Returns (January 22, 2021). Available at SSRN: or


  • Data published by the BLS last week showed the U.S. added 49,000 jobs during January, after a steep drop in December. Business and professional services saw strong job gains, though a large portion was from temporary help roles. Other sectors showed continued weakness, including labor and hospitality, which shed an additional 61,000 jobs after losing 536,000 in December. The unemployment rate fell from 6.7% to 6.3% during the month, but much of that was due to people dropping out of the labor force all together. The pace of the job recovery appears to be stalling, though economists are hopeful it will regain momentum as warmer weather returns.
  • According to data from FactSet, 59% of companies in the S&P 500 have reported Q4 earnings. 81% of these companies have beat earnings estimates, while 79% of beat revenue estimates. The YoY growth in earnings for companies that have reported blended with the estimates for those companies that have yet to report currently stands at +1.7%. If the earnings growth rate remains positive, it will be first quarter of YoY earnings gains since Q4-2019. It is critical for business earnings to grow in order to justify the lofty valuation of the stock market.  
  • The data flow for this week will be relatively light. Noteworthy prints to watch for include U.S. and Chinese inflation on Wednesday, jobless claims on Thursday, and consumer sentiment on Friday.



  • Where the Jobs Are in One Chart (CNBC)
  • A Better Way to Measure GDP (Harvard Business Review)
  • Job Openings Pick Up in Pandemic-Resilient Industries (WSJ)


  • What Robinhood Traders Need to Know about Taxes (WSJ)
  • Unfortunate Investing Traits (Morgan Housel)
  • Cathie Wood Has Wall Street’s Hottest Hand. Maybe Too Hot (Jason Zweig)


  • 6 Fundamental Leadership Lessons from a Navy Captain (Fast Company)
  • Moving In With Your Parents (NYT)
  • Super Bowl Posts Worst Viewer Ratings Since 2007 (CNBC)


Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)


Source: MarketWatch

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Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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