Emotional investing leads to underperformance
Individuals tend to invest emotionally when managing their own money: they buy investment winners and sell poorly performing investments. Buying into a stock after a sharp increase and selling in a declining market achieves the opposite of buying low and selling high.
Individuals can worry about the ups and downs of the stock market and wonder if they should move their money to cash. However, not investing is also risky. Allowing fear to keep you out of the market can be harmful to your financial health.
Graphic 1: Individuals fail to achieve market returns
Source: DALBAR Quantitative Analysis of Investor Behaviour 2013. S&P data provided by Standard & Poor’s Index Services Group, with results based on the S&P 500 Index. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
The DALBAR company studies actual returns individual investors achieve after accounting for sales, redemptions and exchanges. Over this 20-year period, individuals investing on their own do only half as well as the market.
IT IS IMPORTANT TO INVEST IN EQUITIES
History shows that equities outperform fixed income, allowing you to grow your investments over the long-term, as illustrated in Graphic 2.
Graphic 2: Equities outperform fixed income over the long-term
Source: The S&P data are provided by Standard & Poor’s Index Services Group. U.S. long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbitson and Rex A. Singuefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results
Long-term investing can greatly improve your portfolio’s performance. Individuals have reduced returns when delaying investing or transferring money in an attempt to time the market, as seen in Graphic 3 (next page).
No one can reliably predict when to enter or exit the market. Investment Advisors may show you studies of how their models would have correctly predicted when you should be both in and out of the market, but they only know this in hindsight — No models work consistently in advance.