The nation’s leading financial services market research firm, DALBAR, recently released its 20th annual edition of the Quantitative Analysis of Investor Behavior (QAIB). The QAIB looks back at the previous twenty years to evaluate actual investor returns, as well as the behaviors that produce those returns. In the chart below, we see how the average investor stacks up against relevant benchmarks:
During the 20-year period ending on December 31, 2013, the annual return of the S&P 500 was almost double that of the average equity investor. The average fixed income investor fared even worse, staggering behind Barclay’s Aggregate Bond Index by 5.03% on an annualized basis.
The causality of this performance gap is both simple and complex, as are all things rooted in the human condition. Ultimately, it comes down to the fact that it is human nature to want what we can’t have. In this case, the object of our quest is high returns with minimal risk. The desire for a better, less painful investment too often leads to performance chasing, which causes us to repeatedly buy high and sell low.
The greatest losses most often occur after a market decline. Historically, investors sell their holdings after they experience a paper loss, stay out of the market until it recovers, and buy back in at a premium.
So what do you do? You must fully acknowledge that your investment results are as dependent on your behavior as they are on your investment’s performance. The worst time to sell an investment is when it drops in price. By doing so, you lock in a loss and miss the opportunity to derive any benefits. There are a lot of things you can’t control, including the business cycle, stock prices, and inflation, just to name of a few. But at the top of the list of the things that you can and should control is your emotions.
If improving your results by managing your emotions is one of your financial goals, it’s time to learn the Snider Investment Method. In addition to the goal of consistent monthly income, the Snider Method strives to avoid a permanent loss of capital. One of the overarching principles of the strategy is that we never buy or sell assets in response to something other than a prudent investment decision.
Our next live Snider Investment Course is Saturday, May 17th in Irving, TX. You can also learn the Snider Investment online. For a limited time, you can save $200 off of the course price when you use the code MAY2014. Register now.