{"id":617,"date":"2016-06-16T12:54:53","date_gmt":"2016-06-16T19:54:53","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=617"},"modified":"2016-06-16T12:54:53","modified_gmt":"2016-06-16T19:54:53","slug":"investors-have-a-powerful-friend-but-study-shows-they-also-have-2-fairly-formidable-enemies","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/investors-have-a-powerful-friend-but-study-shows-they-also-have-2-fairly-formidable-enemies\/","title":{"rendered":"Investors have a powerful friend but study shows they also have 2 fairly formidable enemies"},"content":{"rendered":"

This week Dalbar released its annual study of investor behaviour.\u00a0 According to the study, in 2015, the S&P 500 index of US large cap stocks returned +1.38%. \u00a0But the average investor lost money. \u00a0The average return earned by end investors based on when funds were invested was -2.28%. \u00a0Over the last 20 years the S&P 500 earned an average return of +8.2% while investors earned only +4.7%. \u00a0 Clearly the market is a great investment compounding machine and a big friend – where are people going wrong? \u00a0Who is the enemy here?<\/p>\n

Enemy # 1 =\u00a0 Fees<\/strong><\/p>\n

Enemy # 2 = \u00a0Investor\u00a0behaviour<\/strong><\/p>\n

We\u00a0invest in stocks, bonds and other asset classes in order to build wealth. \u00a0We\u00a0defer spending and\u00a0consumption today in order to have spending power in the future. \u00a0We\u00a0are willing to put\u00a0our\u00a0invested money\u00a0at risk in order to fight off the impact of inflation and to earn a positive return. \u00a0Returns compounded over time can have an incredibly positive impact on wealth. \u00a0Even Einstein was enamored with the power of compound interest:<\/p>\n

\n

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”<\/p>\n<\/blockquote>\n

The wonderful mechanism by which we can make this happen very effectively and efficiently is called the market and over long periods of time the market tends to reward those patient investors with returns commensurate with the risk they take.<\/p>\n

Trouble gets in the way of this process when we interfere with the market’s ability to do it’s job.<\/p>\n

To begin with, we get fearful and greedy. \u00a0We think we can outsmart the market by trying to get ahead of the market’s ups and downs, buying to ride swooping updrafts and pulling the rip-cord before plunges. \u00a0In practice people aren’t really capable of doing this effectively. \u00a0We’re just not hard-wired psychologically to deal with the volatility. \u00a0The following chart from realinvestmentadvice.com illustrates quite well what they term the “Investor Psychology Cycle”:<\/p>\n

\"Investor-Psychology-060616\"<\/a><\/p>\n

The impact of bad behaviour on wealth over time can be devastating – not only being unable to resist the impulse to buy\u00a0more at points of market euphoria but also selling out in a panic at market bottoms – both behaviours can be\u00a0portfolio killers! \u00a0 The sensible thing to do is to rebalance your portfolio in a very disciplined manner which helps you take advantage of market volatility rather than being hurt by it. \u00a0Sensible but very hard!<\/p>\n

Some\u00a0people deal with it by handing their money to an “expert” who claims to\u00a0know how to time the market’s ups and downs. \u00a0So instead of accepting the market mechanism as\u00a0a perfectly acceptable and efficient way to build wealth over the long run, people pay high fees to “experts” who are not only susceptible to the same psychological pitfalls, but according to the evidence regularly fail to earn even market level returns after accounting for their fees.<\/p>\n

The combined impact of high fees and investor behaviour is the result that Dalbar publishes year after year – it’s always the same.<\/p>\n

The market is your friend – harnessed correctly it’s a very powerful way to build wealth – just ask Einstein! \u00a0High fees and poor behaviour (sometimes your own!) are\u00a0enemies of which to be wary!<\/p>\n","protected":false},"excerpt":{"rendered":"

This week Dalbar released its annual study of investor behaviour.\u00a0 According to the study, in 2015, the S&P 500 index of US large cap stocks returned +1.38%. \u00a0But the average investor lost money. \u00a0The average return earned by end investors based on when funds were invested was -2.28%. \u00a0Over the last 20 years the S&P […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[17,7,12,15],"tags":[],"class_list":["post-617","post","type-post","status-publish","format-standard","hentry","category-costs","category-graham-bodel-posts","category-passive-vs-active-investing","category-risk-and-return"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/617","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=617"}],"version-history":[{"count":2,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/617\/revisions"}],"predecessor-version":[{"id":620,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/617\/revisions\/620"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=617"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=617"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=617"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}