Broker Check

Avoid Self-Destructive Investor Behavior

Why did Investors Sacrifice Nearly Two-Thirds of their Potential Return? 

Emotions can wreak havoc on an investor’s ability to build long-term wealth. This
phenomenon is illustrated in the study below. Over the period from 1988-2007, the
average stock fund returned 11.8% annually, while the average stock fund investor
earned only 4.5%.

Why did investors sacrifice nearly two-thirds of their potential return? Driven by emotions like
fear and greed, they engaged in such negative behaviors as chasing the hot manager or
asset class, avoiding areas of the market that were out of favor, attempting to time the
market, or otherwise abandoning their investment plan.

Great investors throughout history have understood that building long-term wealth
requires the ability to control one’s emotions and avoid self-destructive investor behavior.

Wealth is not determined by investment performance, but by investor behavior. Our value proposition to our clients is as “Investor Behavioral Coaches”. We help our clients to make appropriate behavioral decisions regarding their portfolio by managing the way our clients respond to periods of euphoria near market tops, and to panic and despair, which are very human reactions, around market bottoms.

Hypothetical $10,000 investment made on 1/1/88 and held through 12/31/07, with an average annual total return of 11.8% for the S&P 500 and 4.5% for the average investor in a US equity mutual fund. Past performance is no guarantee of future results. The return and principal value of investment in stocks will fluctuate with changes in market conditions.
Returns assume reinvestment of any distributions and do not include sales charges or the effect of any taxes; if such charges had been included, performance would have been lower. Indices and averages are shown for illustrative purposes only and do not represent the performance of any investment portfolio.
Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (July 2008) and Lipper. Dalbar computed the “average stock fund investor” returns by using industry cash flow reports from the Investment Company Institute. The “average stock fund return” figures represent the average return for all funds listed in Lipper’s U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of a “systematic investor” and “asset allocation investor”. The annualized return for these investor types was 5.8% and 3.5% respectively over the time frame measured. All Dalbar returns were computed using the S&P 500® Index.