Investing looks very simple. With the advent of online information, there are plenty of avenues to understand where and how to invest. It looks so simple to start investing. I often hear from people across walks of life taking investment decisions based on tips from friends, relatives or trusted neighbors or elders from the family. I have also heard many times, people telling me “I checked online and I decided to buy SIPs (Systematic Investment Plans of Mutual Funds) because the website was showing no.1 ranking and top-performing fund”.
If it is this simple, why most of the investors have not made the returns that are equal to Benchmark returns?
As per Dalbar’s March 2019 report on Quantitative Analysis of Investor Behavior (QAIB), “The average investor was a net withdrawal of funds in 2018 but poor timing caused a loss of 9.42% on the year compared to an S&P 500 index that retreated only 4.38%.”
DALBAR Inc., a US-based organization, is one of the most reputed financial services research firms globally. One of their annual studies, “Quantitative Analysis of Investor Behavior” is the most sought-after research report globally.
This is what they write as an introduction to their report:
“Since 1994, DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor’s decisions to buy, sell and switch into and out of mutual funds over short and long-term timeframes. These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves. The results consistently show that the average investor earns less – in many cases, much less- than mutual performance reports would suggest.
In their 2016 study, they mentioned that “No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance.”
DALBAR’s study further mentions in their QAIB that “When discussing investor behavior, it is helpful to first understand the specific thoughts and actions that lead to poor decision-making. Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers, and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance.”
Yes, truth is that our investment performance is all about our behavior, our actions, our reactions based upon our psychological traps and misconceptions. As per DALBAR, nine distinct behaviors tend to plague investors based on their personal experiences and unique personalities.
When real money is involved, when our future is dependent on the outcome of our investment decisions, it gets very tricky. Investment is a journey – a long-term journey, which is easy to plan but extremely difficult to remain on course. These various behavior patterns keep coming back at every stage of life, pushing you to make decisions, which in hindsight turn out to be irrational.
Think again, what is an investment? What is wealth creation? Is it merely a transaction or is it to ensure you reach your goals? Is it merely picking up performing schemes and altering the portfolio at a regular interval based upon the mentioned beliefs? Investing and wealth creation is a game of persistence and discipline and an undeterred view of the long-term with a well chalked out systematic investment plan.
In this journey of yours, the job of your advisor is to nudge you from time to time, act like a friend, a well-wisher, a guide, a teacher, a co-passenger; who will desist you, when you desperately want to do something to feel in control. Choose your advisor carefully as he/she does it non-emotionally for you. The reward of having an advisor may not be visible the way his cost will be.
If you are in confusion as to what to do with your investments, why not get your portfolio reviewed to get an unbiased view by registering for a FREE 30-minute call with us. Please click the below link & go to book my calendar section and register.
Please note: Complete credit for this article goes to DALBAR Inc.
The reports of DALBAR’s Quantitative Analysis of Investor Behaviour (QAIB) is available from DALBAR by visiting the QAIB Store at www.QAIB.com, calling 617-723-6400 or emailing QAIB@dalbar.com.
DALBAR, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, and service. Launched in 1976, DALBAR has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers, and financial professionals. DALBAR awards are recognized as marks of excellence in the financial community.
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