For most things in life there’s a penalty for a lack of discipline.
Get caught speeding and you’ll get a fine, hit someone on the football field and you’ll get suspended.
Some of us might even remember when they used the cane at school; though I’d argue that punishment never fitted my alleged crimes!
When it comes to investing the same principle applies, if you don’t have discipline you’ll end up being punished.
Since 1994, Dalbar, a financial research firm, has conducted the Quantitative Analysis of Investor Behaviour study and it’s become a fascinating reference point.
It compares returns of share funds and markets against the returns of the average investor.
It consistently paints the picture of investor returns lagging behind fund or market returns.
From 1990-2009, the average US share fund returned 8.8% annually, while the average investor in US share funds only earned 3.2%.
Why the 5.6% hair cut?
1. Market timing. Many people assume they know what is happening next and they pay dearly for second guessing times they should be in and out of the market.
$1000 left invested in the ASX 300 from 1992 to 2009 would have grown to $5,768; take away the best 25 days in that period and $2,050 is the paltry result!
2. Herd Behaviour. Investors move into markets after sustained rises; fearing they may miss further gains, while also believing it’s now ‘safe’ because others have invested.
Similarly they panic in a decline, selling out when hearing of falls.
Inevitably they then miss the turn around, waiting until the herd has moved and they feel safe to enter again.
Legendary investor, Benjamin Graham once said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
It’s true! Disciplined investment behaviour and a portfolio structured to your needs will always outperform the unfocussed and emotional approach to the markets.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial advisor. Want to learn more about the value of financial advice?
