Taking the Emotion Out of Investing
|Friday, March 17, 2017|
By: Stefano Pannu, BA CFP
As financial advisors, a big part of our job is to guide and steer investors in the right direction when it comes to portfolio management. The goal of a typical investor, and this may come as a shock to you, is to generate a consistent long-term return that is suitable to their risk profile and time horizon. However, the real shocking part is that the majority of investors do not achieve this and a big factor that plays to this underachievement is emotion.
Investors have a tendency to pile money into investments at the top of a market cycles and in turn, sell near or close to the bottom. This is a result of many factors such as fear portrayed by the media during times of market turmoil, the euphoric feeling investors typically get during ‘up’ periods and alternatively the depressive feeling that comes when things are on a downward spiral and the fear of “losing” money due to a lack of understanding of market ebb and flows.
Let us take a look at the numbers and see what they have to say about emotional investing. In a study conducted by Bloomberg LP in 2015, it showed the 20-year annualized returns from 1996 to 2015. The study broke down certain asset classes as to the annual rate of return they would have produced over that time period. The S&P 500 Index out of the United States would have returned 8.2% annually, while other sectors such as Gold, US Home Prices and Oil would have produced a rate of return of 5.2%, 4.9% and 3.2% respectively. However, the average investor, net of all fees, redemptions and withdrawals, would have returned a measly 2.1% annually over that same 20 year time frame. Inflation itself would have done 2.2% annually!
The main point to take away is that as long as you have a properly structured portfolio that matches your risk profile, time horizon and goals, you want to be aware of the potential performance of the portfolio in the up periods as well as the down.