Financial Strategies

Are you an average investor, with emotions driving decisions?

Column by Patricia Kummer
Posted 11/19/19

The nation’s leading investor behavior study for over 25 years was just released. I always find these interesting since it highlights our human nature … to make decisions with our emotions. Most …

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Financial Strategies

Are you an average investor, with emotions driving decisions?

Posted

The nation’s leading investor behavior study for over 25 years was just released. I always find these interesting since it highlights our human nature … to make decisions with our emotions.

Most of the studies indicate how poor the average investor is in making decisions on when to invest and for how long. However, this study was particularly alarming as the headline reads “DALBAR study shows the average equity fund investor lost twice the money of the S&P in 2018.”

The study goes on to explain: “The average investor was a net withdrawer of funds in 2018 but poor timing caused a loss of 9.42 percent on the year compared to an S&P 500 index that retreated only 4.38 percent”¹

DALBAR’s Quantitative Analysis of Investor Behavior Study (“QAIB”) has been analyzing investor returns since 1994 and has consistently found that the average investor earns much less than market indices.

I am not a fan of measuring against an index, since you can’t actually invest in an index. It is a barometer commonly used for those who don’t want to go to the trouble to figure out what is needed to make their financial plan work. I do caution investors not to measure themselves against a single benchmark of any kind, but rather track your investments against your own goals and strategy. Keep in mind that indexes do not consider taxes, costs or the internal dynamics of an index, and the fact that it changes over time.

Back to the subject of investor behavior, see which of these common behaviors² best describe you:

Loss aversion: The fear of loss is greater than the need for gain, and panic selling sets in.

Narrow framing: Making decisions about one part of the portfolio without considering the effects on the total.

Anchoring: The process of remaining focused on what happened previously and not adapting to a changing market.

Mental accounting: Separating performance of investments mentally to justify success and failure.

Lack of diversification: Believing a portfolio is diversified when, in fact, there is considerable overlap or duplication.

Herding: Following what everyone else is doing. Leads to “buy high/sell low.”

Regret: Not performing a necessary action due to the regret of a previous failure.

Media response: The media have a bias toward optimism to sell products from advertisers and attract viewers or readers.

Optimism: Overly optimistic assumptions tend to lead to dramatic reversions when met with reality.

It is virtually impossible to avoid all of these behaviors unless you have a coach and a strict investment policy and can detach your emotions from your decisions. It may be well worth the advisory fee to design your portfolio, research the best investments and know when to buy and how long to hold.

The year 2019 is proving to be an interesting year in the stock market. I wonder what next year’s study will show and if you will be a part of it or if you will arm yourself with the help and advice.

1. DALBAR, Inc.

2. Market Watch: Lance Roberts

Patricia Kummer has been a Certified Financial Planner and a fiduciary for over 30 years and is Managing Director for Mariner, LLC d/b/a Mariner Wealth Advisors, an SEC Registered Investment Adviser. Please visit www.marinerwealthadvisors.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Suite 500, Overland Park, KS 66211.

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