Emotional investing takes its toll
Study shows what investors could have earned by staying invested
The average investor is earning only a fraction of what the markets have to offer, and emotions are to blame, according to the latest study on investor behaviour by research firm Dalbar Inc.
The well-known annual study measures the gap between what investors actually earned over a 20-year period, moving in and out of the markets as they typically do, and what they could have earned by staying invested through market cycles.
For the 20 years ended 2008, the S&P 500 Index returned an average 8.35% a year while the average equity investor earned only 1.87%. The average bond investor, meanwhile, earned 0.77% compared to 7.43% for the Barclays Bond Index, which represents U.S. bonds.
Unfortunately, it's human nature for individual investors to "sell low, buy high" - the exact opposite of smart investing. Investors tend to panic and sell after market downturns, then hesitate to get back in until after markets have recovered. Euphoria then drives them to buy more at the top of the market, after markets have soared, only to bail out after the next market correction.
A variation of this emotion-driven behaviour is buying into the latest top-performing fund, watching it run out of gas, then shifting whatever's left to the next new "hot fund." On average, investors hold each fund less than three years - and our team can tell you that this makes it very difficult to achieve long-term growth.
We've said it before and we'll say it again: Discipline and patience are a must if you want to reap the rewards of investing in the market. We continue to advise our clients to stick to their long-term plans, and lean on our team of professionals whose job it is to make decisions based on logic, rather than emotion.
Return to Newsletter
The information contained herein is for ON residents only and does not constitute an offer to sell or solicit sales in any other Canadian or foreign jurisdictions.
If you wish to unsubscribe from this newsletter, click here.