At MASECO we are strong believers in focusing our efforts on controlling what we can and optimizing the chances for success over what we cannot control.
Arguably the most important factor we should be able to control is our behavior through the market cycles, but as most experienced investors know this is easier said than done.
Perhaps the most famous study on investors’ average returns compared to the market is the DALBAR study, which found that over the last 30 years equity fund investors achieved an average return of 3.79% against the index return of 11.06% and the average fixed income fund investor achieved 0.72% against an index return of 7.36%. Inflation was 2.70% over the period. Fund fees can explain some of the underperformance, but the vast majority is down to bad market timing decisions. The investor is his own worst enemy – why is this?
A lot of research has been done on this and it is essentially down to what John Maynard Keynes called ‘animal spirits’ that overpower our logical better knowledge in situations of stress.
However, perhaps the more helpful question is what can we do about it? Well the first step is to engage a good wealth manager that can guide you through highs and lows, but education is also powerful. I am a big fan of TED talks and recently watched a talk about using mindfulness to beat addiction and compulsive behavior. I think it translates very well to investing and is well worth a watch.
‘The value of an investment and the income from it could go down as well as up’. You may not get back the full amount of your original investment. Past performance is not an indicator of future performance.