There are many tips and lists to help improve investor returns, but we believe investor behaviour is the most important one.
As humans, we rely on logic, but emotions often get in the way. We are naturally programmed this way as part of our "fight or flight" DNA.
It is natural to feel frustrated and want to follow strong-performing investments. The challenge is if you jump around trying to catch the top performer, it rarely works out. Every year, an independent financial analytic firm, Dalbar, compares investor results to a relevant benchmark. Most of the data is from the U.S., but we feel it is relevant to Canadians.
The most recent report, covering 10-year period data ending on Dec. 31, 2017, noted the S&P 500 Index (S&P 500) average return was 8.5 per cent versus the average U.S. equity mutual fund investor of 4.88 per cent, for a shortfall of 3.6 per cent. To put it another way, the average investor underperformed the market returns by staggering 42 per cent.
We do not find it a coincidence that this 10-year period includes the financial crisis of 2008, when many investors’ resolve were taken to the limits and some may have made emotional decisions to sell at a poor time.
Dalbar goes on to conclude that “No matter the state of the industry, boom or bust, investment results are more dependent on investor behaviour than fund performance. Mutual fund investors who hold their investments have been more successful than those who try to time the market.” It is worth adding that fees do affect performance however; they are the second detractor of results.
Investors are continually influenced throughout good and bad markets by the media and industry professionals vying for attention and trying to forecast an unknown future. We would add that many of these pundits are not accountable to sit across from you, the client, admit they got it wrong and how it impacted your net worth as a result.
A recent example was in last December's sharp market sell-off, when many of the headlines were screaming to get out and the worst is yet to come — only to have the market turn around on Dec. 26 and make a phenomenal recovery in early 2019.
In this day and age, most people are too connected. Investors are influenced by short-term results despite having longer-term goals. In our experience, retirees are more vulnerable since they no longer work and often rely on their savings. Some watch the business news and check their accounts online daily. A good analogy is: “If you planted a tree, would you dig it up every day to see if it took root?” If you feel you need to check daily, you may need to revisit your portfolio mix.
We are not saying we should take an “ostrich approach,: but practising patience and looking only a few years into the future tends to help ground oneself and improve decision making. Like fitness and weight loss, people need to stick with their plan over time to reap the benefits. We believe there are no shortcuts to good health or investing wealth.
Until next time, invest Well. Live Well.
This document was prepared by Eric Davis, vice-president, portfolio manager and investment advisor, and Keith Davis, investment advisor, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc.-Member of the Canadian Investor Protection Fund. All insurance products and services are offered by life licensed advisors of TD Waterhouse Insurance Services Inc., a member of TD Bank Group. For more information, call 250-314-5124 or email Keith.email@example.com.