Are Your Clients’ Emotions Getting in the Way of Their Success?
It’s been an incredible 9-year bull run in the financial markets. The recent spike in volatility is indeed unsettling to investors, causing many to wonder “Is this it? Is this the big one?” During his Reddit “Ask Me Anything” session on Tuesday (2/27/18), Bill Gates added to the drama when he was asked if a crisis similar to the one in 2008 was coming in the near future, replying, “Yes. It is hard to say when but this is a certainty.” Whether we like to admit it or not, fear of losing hard earned money tends to rule the investment process and decision making because humans can behave differently when under stress.
According to DALBAR’s 22nd Annual Quantitative Analysis of Investor Behavior, “Investment results are more dependent on investor behavior than on fund performance.” This is further illustrated by their analysis of 20-year average investor returns. We’ve provided a chart below that outlines their findings.
The data shows that investors tend to make decisions at times that are less advantageous costing them significant investment performance. For example, $100,000 invested the S&P 500 in 1997 would be worth $440,874 in 20171. At the Average Investor annualized rate of 2.3%, the result is only $157,584 during the same 20-year period1. In times of market volatility, it is difficult to simply stay in the market. Many get caught up in selling and buying at the wrong times driven by emotional decision making.
Statements like “it can’t possibly go any higher” have little effect on the financial markets as proven by the last 3 years of this current bull run. Industry experts were calling for a top in early 2016. Heeding this advice could have caused investors to miss out on over 20%+ appreciation.
Additionally, as shown by the study, remaining invested in the markets instead of trying to go in and out tends to lead to better results over the long-term. However, to do this, investors must be comfortable with what is happening in their investment portfolios and focus on keeping their emotions in check.
With that said, keeping investors comfortable is no easy task. Markets are unpredictable; when risk escalates, asset returns can be quite volatile. To manage market volatility and investment risks, we find it best to have a disciplined, well-tested quantitative process that removes subjectivity and emotion resulting in consistent and repeatable investment decision making. We believe this approach significantly increases the probability of keeping investors invested for the long-term.
1Caclulated by compounding annually for the time period 1997-2016.
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