During the period 1985-2004, stocks had a pretty good run overall...up 13.2% annually over this 20-year time period.
Sadly, during this same time span, the average equity investor was up only 3.7% per year, just barely beating inflation which was up 2.9% during this time. (According to Dalbar's recent report: Quantitative Analysis of Investment Behavior 2005)
In dollar terms, the difference is even more striking. $100,000 invested in the S&P 500 in 1985 becomes $1,193,792 in 2004. In contrast, $100,000 at 3.7% would grow to $206,816 in twenty years...a difference of $986,980!
Given this unfortunate reality, the financial advisor is provided an interesting opportunity to engage investors whose performance has trailed over the years.
Example:
- Advisor: Mr/Ms Prospect...I wonder if it's possible that you have made a million-dollar mistake.
- Prospect: What are you talking about?
- Advisor: During the period, 1985-2004, stocks were up about 13.2% per year. However, the average investor experienced a 3.7% return during this same time period. Over a twenty year period, the difference in these returns is about $1,000,000...for investors who had $100,000 in the market back in 1985.
- Prospect: Oh
- Advisor: Offhand, do you know what your portfolio returns were over the past twenty years?
- Prospect: Not really.
- Advisor: Would you like to know?
- Prospect: Of course...I think.
- Advisor: If you got all of your statements together, I'd be glad to calculate this for you.
- Prospect: I don't have my statements for the past twenty years.
- Advisor: No problem. Let's start with the past five. Let's compare over this time period.
- Prospect: Since you have your calculator out, could you take a look at my mom's account too?
- Advisor: Sure...why not?
Let me know if this approach works for you. Give it a try...and good luck!
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