Watch your behaviour!

It has been proven that the best indicator of investment return is not the funds where you are invested, nor the quality of your fund manager, but it is your behaviour as an investor that makes the biggest difference. The DALBAR 2015 Quantitative Analysis of Investor Behaviour report has shown time and time again that the returns that investors actually realise is hugely influenced by their behaviour. Since 1994 DALBAR’s QAIB has been measuring the effects of investors’ decisions to buy, sell and switch into and out of mutual funds over both short- and long-term time frames. The results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.

Just give some thought to the current situation: We are bombarded by the FTSE index at almost every news bulletin so we know that the ‘market’ has fallen over the last 6 months or so. For my clients their portfolios are balanced by bond investments so that they will not experience the same fall, however let’s continue our focus on the equity portion of your investment. Prices have gone down so the intelligent investor will be rushing out to buy, they will be converting their cash into equity investment. It may still go down further but we don’t know where the bottom of the wave is because none us has crystal ball. However one thing that we can be sure about is that after every downturn there is always a significant upturn. The stock market crash of 1987, 2001, and 2008 to mention just some of the downturns shows that people who invest when the markets are down always make significant returns when the market bounces back. Today represents good value to get into equity investment and if you already own equities it makes just as much sense to stay put.

What does the unintelligent investor do? They panic and sell their equity holdings after the market has gone down and then wait until the market has gone up before they get back in. It’s just like doing your weekly shop at Asda or Tesco and before you put anything into your trolley going to the service desk and saying: “please give me a list of your offers this week because I don’t want to buy any of those. I just want to wait until things have gone up in price before I stock up on them!” It might sound silly but it’s one of the reasons why the average investor earns much less than they should. I may return to other investor behaviours which reduce their investment return in a later newsletter. Please let me know what you think?

 

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