2011 Dalbar Study: Why The Average Equity Fund Investor Will ALWAYS Trail The Market...

From December 31, 1990 to December 31, 2010, the S&P 500 gained +9.1% per year.

But the average equity fund investor has gained less than half of much, only +3.8%!

During the same period, the typical aggregate bond index gained +6.9% per year.

But the average fixed income investor has earned 7 times less!!!, only +1.0%!

BOTTOM LINE:

1. Sadly, over the past 2 decades, investors haven't built any real wealth during neither the past 10 years nor the past 20 years. Taxes, inflation, fear, greed, the business cycle, financial crises and market meltdowns all conspired to, not grow, and not even maintain, but shrivel the purchasing power of the average investor.

2. The vast majority of passive investors simply don't have and never will have the psychological discipline to keep the faith during bear markets meltdowns of -30%, -40% or -50% that decimate their retirement nest eggs.

And who can blame them?

Thankfully, there is a better way.

Why The Average Equity Fund Investor Will ALWAYS Trail The Market...

From January 1, 1990 to December 31, 2009, the S&P 500 gained +8.2% per year.

But the average equity fund investor has gained less the half of much, only +3.2%!

During the same period, the typical aggregate bond index gained +7.1% per year.

But the average fixed income investor has earned 7 times less!!!, only +1.0%!

BOTTOM LINE:

1. Sadly, over the past 2 decades, investors haven't built any real wealth during neither the past 10 years nor the past 20 years. Taxes, inflation, fear, greed, the business cycle, financial crises and market meltdowns all conspired to, not grow, and not even maintain, but shrivel the purchasing power of the average investor.

2. The vast majority of passive investors simply don't have and never will have the psychological discipline to keep the faith during bear markets meltdowns of -30%, -40% or -50% that decimate their retirement nest eggs.

And who can blame them?

Thankfully, there is a better way.

The Average Equity Fund Investor Trails the Market By A Wide Margin...

"A study by research firm Dalbar Inc. reveals that for the 20 years ending December 31, 2009, annualized returns for the S&P 500 index were +8.2%, but returns for the average stock (equity fund) investor were only +3.2%."

U.S. News & World Report, October 2010 Issue

A +8.2% per year average return means that a $100,000 investment in the S&P 500 grew to $483,666 over 20 years. 

But the average equity fund investor only earned +3.2% per year. Under that scenario, $100,000 grows to only $187,756 in 20 years.

But wait. Are we done yet?

What about inflation?

We have to account for the fact that inflation averaged +2.8% during the past 20 years. That means that $100,000 has to grow to $173,015 over 20 years just maintain its purchasing power!

What about taxes?

Because investors were buying high and selling low, they incurred tax liabilities that would reduce their inflation-adjusted and tax-adjusted returns below the rate of inflation.

That means the average investor's purchasing power after taxes,  inflation and a +3.2% annual return has not increased, rather it has steadily eroded.

Another "average investor" study by TrimTabs Investment Research shows that the stock market ended the past decade pretty much at break even, but average investors lost roughly -$39 billion, or roughly -20% over the past 10 years.

"It cost them about -20% to buy high and sell low," says TrimTabs' Vincent Deluard.


BOTTOM LINE: 

1. Sadly, over the past 2 decades, investors haven't built any real wealth during neither the past 10 years nor the past 20 years. Taxes, inflation, fear, greed, the business cycle, financial crises and market meltdowns all conspired to, not grow, and not even maintain, but shrivel the purchasing power of the average investor.


2. The vast majority of passive investors simply don't have and never will have the psychological discipline to keep the faith during bear markets meltdowns of -30%, -40% or -50% that decimate their retirement nest eggs. 


And who can blame them?

Thankfully, there is a better way.

Please - No More Stimulus!

Canada has been cutting spending and tax rates for the past decade or so. If Keynesians are right, the U.S. economy should be outperforming the Canadian economy now and Canada should have done better back in the 1980s and 1990s, right?

Wrong. It's the opposite.

The unemployment rate in Canada is currently 8% and has been below the U.S. level since October 2008, when government spending started to go crazy.

The lesson is clear: Less spending, less taxing and more freedom work.

Let's not stimulate anymore. The U.S. economy just can't take it.

Q&A: Paying Taxes After a Roth IRA Conversion - Ask Encore @ WSJ.com

Ask Encore @ WSJ.com 
Focus on Retirement - By KELLY GREENE

Q: In 2010, when the income limits are lifted for converting a traditional IRA to a Roth IRA, my wife and I plan to convert about $50,000 in traditional IRAs. We plan to pay the taxes with funds from outside the IRA and also to pay them all in the 2010 tax year.

Our question is this: At what time during the 2010 tax year are the taxes due? For example, if we convert in January 2010, do we need to pay estimated taxes for first quarter of 2010 by April 15, 2010? Or can we wait to pay the taxes until we file our 2010 taxes in March or April of 2011—without incurring a penalty for being "under-withheld"?

If we would need to pay quarterly estimated taxes, it would probably cause us to defer the conversion until the fourth quarter of 2010, and thus not owe the taxes until 2011.

—Paul Sklar Pittsburgh, PA

A: You're ahead of the game, because many people have no idea that converting assets to a Roth IRA could affect the timing of their tax payments.

To review: Effective Jan. 1, 2010, the federal government is permanently dropping the income limit for transferring savings to a Roth IRA from a traditional individual retirement account or employer-sponsored retirement plan. Although such conversions will be subject to income tax, future withdrawals (that meet holding requirements) would be tax-free.


One important thing to think about in terms of timing: Delaying a Roth conversion until the fourth quarter of next year might help you delay paying the tax involved; but if your IRA has fallen in value in the past few years, you may want to convert the account as soon as possible next year, before its value recovers further, to keep the tax bill as low as you can.

"What have you accomplished if the value of the IRA goes up in that time and you pay tax on it?" says Barry Picker, a certified financial planner and certified public accountant in New York. "It could have been in a Roth growing tax-free."

Adds Lester Law, national wealth strategist for U.S. Trust, Bank of America Private Wealth Management: "This is not a tax payment decision; it's an investment and estate-planning decision. Don't let the tax tail wag the dog."

Generally, you have three options for paying income tax throughout the year, and thus avoiding a penalty and interest for underpayment of your income tax.

1. The first is to pay 100% of last year's tax, or 110% of last year's tax if your adjusted gross income is over $150,000 for individuals or for married couples who file joint tax returns. This method is the one most commonly used and it will probably work for most people who plan to pay any income tax for a 2010 Roth conversion as part of their 2010 tax return, Mr. Law says.
   
   
2. The second option is to pay 90% of the current year's tax, which is something that people who convert a large amount to a Roth in 2010 may want to consider doing in 2011 as a way to lower the tax amounts that they pay quarterly or have withheld from their paychecks, he says.
   
   
3. The third option is to estimate your income each quarter and pay tax on it for that quarter, Mr. Law says.

As for the mechanics of actually making the payments: You can have the tax withheld from your paycheck; you can make quarterly payments (actually due April 15, June 15, Sept. 15 and Jan. 15); or you can do a combination of both, Mr. Law says.

One Other Note: Conversion income might drive up your state income taxes as well. To get a definitive answer for a specific state or local government, you should check with a local accountant.

Write to Ask Encore at encore@wsj.com