1 chart shows just how badly average investor lags — even cash

When chaos strikes, the average investor heads for the hills and ends up paying the price in long-term underperformance, says one of Wall Street’s most prominent bulls.

As this chart from Richard Bernstein Advisors shows, mom and pop stink it up on a pretty steady basis and have lagged gains in every asset class, with the exceptions of Asian emerging markets and Japanese equities, over the last 20 years. The average investor has even managed to underperform cash – represented in the chart by 3-month T-bills.

“They could have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities,” wrote Bernstein, the former Merrill Lynch strategist who now heads his own eponymously named shop. (Read the note here.)

The chronic underperformance “suggests investors’ timing of asset allocation decisions must have been particularly poor, i.e., investors consistently bought assets that were overvalued and sold assets that were undervalued. They bought high and sold low,” he said.

Bernstein’s warning sort of fits into a theme pushed by other strategists, including Credit Suisse’s Andrew Garthwaite, who have warned against selling too early. Garthwaite is telling clients to stay overweight equities until rates rise. See: Don’t sell stocks too early — and don’t even think of shorting Tesla.

As for the beaten-down average investor, Bernstein thinks persistently poor timing is the result of volatility – or more specifically, investors’ reaction to increased volatility. Simply put, they tend to run away when things start getting chaotic.

That sounds like the flip side of the often-sounded warning that retail investors regularly signal a market top by piling into the market only after all the big gains have been scored.

With stock-market volatility trending higher in recent weeks, investors are again running away, Bernstein says, citing fund-flow data that shows investors have cut U.S. equity exposure for 13 weeks in a row.

“History suggests that the best investment  opportunities are in asset classes that investors shun. We strongly feel investors’ ongoing fear of U.S. equities continues to offer substantial opportunity,” Bernstein says.

– William Watts