Want results from your investments? Don’t get emotional
| Paul Fain, CFP®
Famed investor Benjamin Graham once said, “The investor’s chief problem, and even his worst enemy, is likely to be himself.”
DALBAR, a financial market research firm, conducts an annual study of investor behavior. With 25 years of data, the study’s conclusion is frighteningly consistent – individual investors are woeful market timers – repeatedly buying and selling investments at the wrong time.
The DALBAR study asks a fundamental question: How has the average stock fund investor performed compared to the stock market (S&P 500 Index over rolling 20-year periods)?
In 2018, the results of the study from 1998 to 2018 were published. That specific 20 years of stock investing included two of the worst bear markets in history. The S&P 500 returned 5.6% per year. During that same time period, the average investor only gained 1.9% per year. The average investor didn’t even keep up with inflation.
In DALBAR’s most recent investor study, the annualized S&P 500 return was 7.43%, while the average stock fund investor earned 5.96%. Again, that is a significant performance gap. What is happening in this data? On the surface, the answer is simple: individual investors believe that they can predict when the market will go up or down. They panic sell during frightening market declines (such as February 2020) or become FOMO (Fear Of Missing Out) buyers near market tops. Instead, consider these ideas to build and maintain a sustainable investment plan:
- Define your investment strategy and stick to it. Your investment strategy should be consistent with the long-term goals and risk tolerance driving your personal financial plan.
- Invest in quality. Invest in well-managed investment funds that have proven track records, stable management, and deep research.
- Costs matter. Watch out for high fund management fees and portfolio turnover costs (frequent trading).
- Reduce your screen time. Most “news” programs sell fear because it sells advertising. So, ignore the noise, and stick with your plan.
Our emotions and our investments are like oil and water; they don’t mix. The DALBAR study illustrates again and again that patient, goal-driven and strategic investors outperform investors who are driven by their emotional responses to short-term events.
This article was originally published in the Knox News Sentinel on August 20, 2021