by Shelley Seagler
Once again, DALBAR has released its annual Quantitative Analysis of Investor Behavior. The purpose of this study is to compare the performance of average investors to that of relevant benchmarks. In the image below, you will see that in the 20 year period ending in 2012, the return of the S&P 500 was 8.21%. You’ll also note that the return of the average investor was only 4.25%
So what causes that almost 4% gap between what the market is getting and what you’re getting? Certainly, the fees involved with investing in mutual funds accounts for some of the difference. However, according to DALBAR’s research:
There are actually three primary causes for the chronic shortfall for both equity and fixed income investors:
1. Capital not available to invest. This accounts for 25% to 35% of the shortfall.
2. Capital needed for other purposes. This accounts for 35% to 45% of the shortfall.
3. Psychological factors. This accounts for 45% to 55% of the shortfall
You can learn more about the psychological factors the study refers to in Tyler Curtis’ article, The Investors’ Psyche. The bottom line is this – as an investor, you are hard wired to buy when you should be selling and sell when you should be buying. And this buy high/sell low cycle can destroy your investment performance.
So if you’re hard wired to make a fatal mistake, what can you do? First, avoid market timing the plague. In addition to analyzing overall performance, the QAIB also includes a Guess Right ratio, which finds whether the market is rising or falling, investors cannot accurately predict when to get in or out. Trying to time the market causes investors to suffer losses in a down market and leave money on the table when the market moves up.
Moreover, you have to employ a long-term strategy that forces you keep your emotions in check. One of the underlying philosophical beliefs of the Snider Investment Method is that emotions are an investor’s worst enemy. In other words, as soon as your give in to your emotions, primarily your fear or your greed, you’re jumping on the never- ending roller coaster of buying high and selling low. By following a proven and strategically engineered set of rules, you will finally have the disciple to hop off the ride and take the first step to bridging the performance gap.