By Allen Giese, ChFC®, CLU®

Miami-Dade firefighters: In your 457 deferred comp plan or your FRS investment plan, do you use the self-directed account? If you’re not, are you thinking about it? Then this video might be for you.

Hi. I’m Allen Giese, and our firm, Northstar Financial Planners, helps Miami-Dade firefighters make better decisions with their money. Now for those of you who are wondering what I’m talking about with these self-directed accounts, that’s not a problem. Let me quickly explain.

A self-directed account is an account, usually with a large brokerage firm, that is linked to your core account at your nationwide deferred comp plan or your FRS investment plan. Sometimes these are called SDO accounts (which stands for self-directed option) because you get to decide what investment choices you put in it from the vast array of investments available at the brokerage firm. And, of course, that’s the big advantage of having an SDO—having many more investment choices.

But here’s the other side of that coin: I believe, for most people, an SDO is a great way to get mediocre or even subpar returns, and having all those investment options for most people actually makes matters worse, not better. So why is that?

Well, it really has a lot to do with basic human behavior. Here’s an example: Let’s say I go into a room full of people, and I ask them, “Raise your hand if you think you are a better driver than the average driver.” Now how many hands do you think would go up? Right, virtually everybody believes they are a better-than-average driver, so the majority of the hands will go up, even though in a large room full of people, it’s highly unlikely that most of them are better than average.

Well, we see the same thing with investing. But the truth is, with investing, the average investor just isn’t very good. Take a look at how the average investor actually does compared to what the market is willing to give.

A recent study by DALBAR, a financial research firm, has shown that from January 1st, 1997, until December 31st, 2016—a 20-year span of time—the S&P 500 index (which tracks U.S. large company stocks) went up 7.68%. In this study, DALBAR found that the average equity investor actually only got a return of 4.79%! And the gap in bond markets is even greater. Where DALBAR cited the Bloomberg Barclays US Aggregate Bond index that went up 5.29% over this same time frame, the average fixed income investor only got 0.48%.

So converting that to dollars, had an investor at the beginning of this time frame invested $100,000 and got the S&P 500 return over 20 years, they would have $439,334 at the end. But if they got the average return, they would have ended up with just $254,916. And if they had invested in bonds and got the index return, they would have had $280,188 as compared to only $110,051 with the average investor return.

Now, we believe that most of this difference in return is attributable to bad investor behavior, such as selling stocks after market downturns or emphasizing a strategy that tries to pick good stocks over bad stocks or just thinking they have the ability to time the market and get out before the market drops.

Now, here’s the thing: DALBAR publishes that study every year, and every year we see the same sort of disparity between what the market is willing to give versus what the average investor gets.

So we come across some firefighters that are utilizing SDO accounts because they believe that they’ll be able to pick better stocks or mutual funds from the larger list at the brokerage firm than the funds offered by their deferred comp plan or FRS investment plan. Unfortunately, actual results don’t seem to back this theory up very well.

So beyond these bad behaviors, we believe there’s another major reason having an SDO account can be very dangerous. And that is that we find most investors lack what we believe is the most important component, which is having a proven, time-tested investment strategy. And even if you do have a good strategy, what it really comes down to is how disciplined you are as an investor and how well you stick to it. Don’t have a strategy? Probably that’s your first sign, then, to avoid an SDO account. Probably also a good reason to talk to somebody about developing a strategy.

Want to talk about the right investment strategy for you or how you can utilize your plan better? Give us a call for a second opinion. We’ll talk about where you are now, where you’d like to be, and what the gaps are. Then we’ll evaluate if your current situation has you on track. If it does, we’ll tell you so and recommend you stay the course. If it doesn’t, we’ll show you what you might want to do and evaluate if we’re the right advisor for you. In any case, we think it’ll be worth the call.

Thanks for watching, and stay safe. If you want your own complimentary copy of Retired Battalion Chief Gary Gonzalez’s book that’s all about the intricacies of how to retire from Miami-Dade Fire, give us a call or drop us a line.