The Data
Financial evaluation and auditing specialist Dalbar has published several iterations of a study called “Quantitative Analysis of Investor Behavior”*. The 2001 version of the study was the first to establish the concept that the average investor does not achieve market-index returns: during a 17-year period ending in December 2000, the S&P 500 returned an average of 16.29% per year; in contrast, the average equity investor managed only 5.32%. The 2015 iteration of the same study reached a similar finding: “the average equity mutual fund investor underperformed the S&P 500 by a margin of 8.19%”.**
Investing – No Place for Emotion
At the client-face, wealth managers and financial advisors should have access to emotional empathy and be able to understand their clients’ fears and uncertainty, but unlike individual investors, they are trained to be emotionally unaffected by attachment to a particular bad investment or to fear taking an unconventional route. This means they provide discipline and pragmatism to, hopefully, prevent a client’s wavering from the investment strategy that has been put in place.
Lay investing – A Gambler’s Game?
When habitual gamblers find themselves on a losing streak they may embark upon risky behaviours, for instance, they might double up their bets in an attempt to regain losses. Similarly, lay investors may choose to hold on to an ill-fated stock, either as a result of pride or fear of selling at a loss or even because they hold out a blind hope that the price will bounce back.
Prospect Theory*** was developed by Daniel Kahneman and Amos Tversky to explain why people make decisions based on the potential for loss and gain. The theory holds that these losses and gains are evaluated using a set of judgment calls it has been used to explain why so many investors remain wedded to losing stocks.
However, being aware of unhelpful investor behaviour is no guarantee against failing prey to it; far better for an investor to have the cold eye of a professional to guide them, to help prevent them from over or under-reacting, to keep them disciplined and to prevent them from emotionally holding on to a stock that, to the impartial eye, is unlikely to ever be more than a sure-fire loser.
Making your money work for you
Blacktower (US) LLC helps clients establish informed wealth management and retirement planning strategies so that they can have confidence in being able to enjoy a financially secure retirement.
Furthermore, as we specialise in the many cross-border financial issues facing non-resident aliens in the United States as well as other cross-border individuals, we can help you if have financial interests outside of the United States.
For more information about how we may be able to help you, including wealth management, retirement planning, and management of cross-border pensions, contact us today.
* https://www.dalbar.com/QAIB/Index accessed 22-08-19
** https://www.investopedia.com/articles/05/032905.asp accessed 22-08-19
*** https://www.uzh.ch/cmsssl/suz/dam/jcr:00000000-64a0-5b1c-0000-00003b7ec704/10.05-kahneman-tversky-79.pdf accessed 22-08-19
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