Can investors beat the market? If you search Google for the answer to that question, you are sure to find people who say yes, while just as many others say no. At M.J. Smith & Associates, we remain firmly in the “no” camp, and offer our latest white paper as evidence for your consideration.
We base our white paper on our firm’s experience of more than 30 years, as well as significant research on the topic. Dalbar, Inc., for example, is an independent investment company research firm whose 2016 Quantitative Analysis of Investor Behavior begins with a bold statement: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market. In fact, according to Dalbar, the average investor has not kept pace with the markets over the last 20 years!
In our opinion, a variety of factors contribute to this type of performance, including emotional trading, poor discipline, inadequate investment policy statements, failure to rebalance and inappropriate asset allocation. In addition, as Dalbar reports, investors have a tendency to chase performance. Despite disclaimers like, “Past performance is no guarantee of future results,” investors still have a tendency to pick investments that have performed well recently, even though that performance has absolutely no bearing on how the stock could perform in the future.
Dalbar identified nine distinct behaviors that can cause investors to make poor decisions around their investments:
- Loss Aversion: Expecting to find high returns with low risk
- Narrow Framing: Making decisions without considering all implications
- Mental Accounting: taking undue risk in one area and avoiding rational risk in another
- Diversification: Seeking to reduce risk, but simply using different sources
- Anchoring: Relating to the familiar experiences, even when inappropriate
- Optimism: Believe that good things happen to me and bad things happen to others
- Media Response: Tendency to react to news without reasonable examination
- Regret: Treating errors of commission more seriously than errors of omission
- Herding: Copying the behavior of others even in the face of unfavorable outcomes
Do you see your own behavior in the points listed by Dalbar? If so, then it may be time for you to get a second opinion from an advisor you can trust. The advisors at M.J. Smith & Associates help clients understand that their focus should not be on beating “the market” or any other related index. That’s because achieving your financial goals should be the primary objective in managing your assets. When you work with us, we analyze your retirement goals, education funding needs, risk tolerance, income tax assumptions and time horizon before making any investment recommendations. Without this information, you could likely still be in the dark about how best to allocate your assets.
When investors stay focused on asset allocation without deviating from an investment policy statement designed to meet their goals, we believe it’s possible to narrow the gap between the “average” investor’s returns and those generated by the market. If you’d like a second opinion on your portfolio, I encourage you to contact us for a complimentary, no obligation review. We’d be glad to help you take an objective view toward planning your future.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mark Smith and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Future investment performance cannot be guaranteed; investment yields will fluctuate with market conditions.