Whether you are saving for retirement or already enjoying the party, one question that is often pondered is, “Should I use a financial adviser to manage my retirement portfolio or can I save money by doing it myself?”

Naturally, the answer depends on how comfortable you are with doing it yourself. If you understand basic investment diversification and asset allocation strategies, and are comfortable with making an investment strategy choice, creating a relatively low-cost diversified portfolio is very possible. But, there are a few other things you may want to consider before you tell the pilot to get out of your chair.

Inevitably, the time will come when you will be making investment decisions that will impact a meaningful portion of your retirement nest egg. When that time comes and a change needs to be made, will you be able to effectively execute that change? According to a recent annual study, you probably won’t be.

Every year, Boston research firm DALBAR releases their annual Quantitative Analysis of Investor Behavior (QAIB) report which takes a look at what drives individual investor decisions and how the subsequent results of their actions measure up against the broader market indices. In its 2015 report (for annual returns ending 2014) the results were worse than you might think.

According to DALBAR, at the end of 2014 the 20-year annualized return of the S&P 500 was 9.85%, while the 20-year annualized return for the average equity mutual fund investor was 5.19%. To put that into perspective, the value of $100,000 invested in the S&P 500 from 1995 – 2014 would have swelled to $654,638, whereas the average equity mutual fund investor only saw $275,099 in their account after the same time period. When they shortened the investment period to the 10 years ending in 2014, the average investor’s annualized return improved to 5.26% versus the S&P 500’s 7.67%. However, over the long term, the 30 year average annualized return difference widens substantially. According to the report, the equity fund investor only averaged a 3.79% annual return for 30 years, while the S&P 500 returned 11.06% annually.

Why did the average investor perform so poorly? While DALBAR offered up several distinct investor behaviors that lead to the poor decision-making, (nine to be exact) I would place ‘loss aversion’ as the leading cause. Loss aversion refers to one having a greater preference towards avoiding losses, than achieving gains. In other words, you are more inclined to sell your winning stocks and hold on to your losers until they return to positive territory. The idea of “taking some profits” makes you feel better than accepting a loss. And while this action makes you feel better about your investment selection, the long term result is a much lower return than otherwise could have been achieved. As the DALBAR report showed, the greater the time period, the wider the gap between the individual investors return and the S&P 500 benchmark return.

It has been my experience that most people who choose to manage the bulk of their retirement assets on their own, do so because they don’t want to pay a professional manager the 1 - 2% fee. That is a fair point, but it is worth noting that the opportunity cost to the individual investor is likely much greater than the management fee they saved. Especially over the long term.

Kevin Warman

Last Updated 4/05/2016

Note: The return information provided in this article represented only a portion of the return data provided by DALBAR in their study. For more information, you can visit www.dalbar.com