Traits of short-term investors

By David B. Armstrong, CFA | Apr 09, 2020 | Weekly Market Commentary

It would be great if we could identify the market bottom and time every buy-and-sell trade to perfection, but the reality is that those who try are often rewarded with nothing but regret.

Buy too early and stocks continue to fall = Short-term regret, pain, and second guessing.

Buy too late after stocks have recovered = Short-term regret, pain, and second guessing.

There is a common chorus among investors, “Why not just invest in the S&P 500?”

While that sounds easy, in reality it is rife with complication and its simplicity and effectiveness are often the casualty of investor meddling.

In market and economic environments like this, people start to overthink things and I think that’s when a lot of damage gets done. There is often both panicked selling and delightful overconfidence at the wrong moments.

These behaviors weaken our chances of real success…and make people poorer.

Despite the repeated reminders not to try to get too smart for their own good, a lot of investors still believe they have some sort of superpower – the ability to know what’s coming next. It’s proven every year in something called the Dalbar Quantitative Analysis of Investor Behavior, or QAIB.

According to Dalbar, the QAIB uses data from the Investment Company Institute (ICI), Standard & Poor’s, Bloomberg Barclays Indices and proprietary sources to compare mutual fund investor returns to an appropriate set of benchmarks. The study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior.

The 2019 report shows that in 2018 the average investor underperformed the S&P 500 by 5.04%. (I’m thinking the 2020 report on 2019 should be out shortly.)

Here’s a look at longer-term underperformance from a New York Times article in July 2019. It shows that the annualized return of the average mutual fund investor underperforms the S&P 500 by 88 percentage points over 30 years, 46 percentage points over 10 years, and 35 percentage points over five years.

Annualized – not total, ANNUALIZED.

The real superpower is patience and discipline, but I know it’s hard to stay disciplined and keep a long-term perspective when the media is barraging us with daily news. That racket draws our attention and tempts us to DO SOMETHING.

But “doing something” is often times the worst possible response to the short-term news. Presuming you have a well thought out financial plan and investment strategy specific to you and your unique needs, doing nothing is almost always the best thing to do.

This is why we advocate for having a wealth plan, identifying your cash needs so that you are not forced to sell during a crisis, and having an appropriate investment.  A wealth plan should provide you with the level of comfort necessary to DO NOTHING. Doing nothing ensures you are properly invested during the recoveries which come more quickly than most people realize.

Right now, the market is back around where it was last summer. Hardly crushing. If you didn’t think your portfolio value was horrible in August of 2019, I think you are probably okay.

We are not out of the woods yet, but those who have weathered the storm so far have seen a nice recovery, that is if it can hold and continue from here. See this chart for what I mean.

Keep looking forward,

Dave

 

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