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Invest Well. Live Well: The biggest mistake an investor can make

The past couple of weeks have been a bumpy ride for investors. Fears of the novel coronavirus across the globe have sent markets into correction territory, dropping more than 10% in a matter of days.
Invest Well Live Well Eric Davis Keith Davis

The past couple of weeks have been a bumpy ride for investors.

Fears of the novel coronavirus across the globe have sent markets into correction territory, dropping more than 10% in a matter of days. Market moves like this can make investors nervous as our natural instinct of fight or flight kicks in.

The challenge is if you jump around, trying to time the markets, 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 showed that, over the 20-year data period ending Dec. 31, 2018, the average S&P 500 Index return was 5.6% versus the average U.S. equity mutual fund investor of 3.9%, or a shortfall of 1.7% per year. Put another way, the average investor underperformed the market returns by a staggering 34%.

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 experts all vying for attention and trying to forecast an unknown future. I would add that many of these pundits are not accountable to you as a client.

Rewind to December 2018, when markets suffered their sharpest selloff since 2008. Many headlines screamed to get out and the worst was yet to come — only to have the market turn around on Dec. 26 and make a phenomenal recovery. Had one panicked and sold out, they would have incurred substantial losses and missed a great year in 2019 for investors. Furthermore, how does one get back into the market after stepping out and watching it move to record highs?

In this day and age, most people are too connected. Investors are influenced by short-term results despite setting up a longer-term plan. In our experience, it can help to take a step back and realize that, during previous market drops, investors that stayed the course typically saw their portfolios recover and grow to new heights.

We do not advocate an ostrich approach; however, practising patience and looking only a few years into the future tends to help ground oneself and improve decision making.

Similar to fitness and weight loss goals, people need to stick with their plan over time to reap the benefits. It also helps to have a good coach along the way reinforcing the right behaviour.

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.davis@td.com.