History shows investment inflows (people buying) are highest after periods of strong performance and outflows (people selling) peak after periods of poor performance. In other words investors tend to buy at high prices and sell at low prices resulting in wealth destruction and performance below that of what markets deliver.
US market research firm Dalbar has studied this behaviour and estimates for the period from 1991 to 2010, when the S&P 500 index retured 9.1% p/a, investors earned on average just 3.8% p/a due to buying and selling at the wrong time. For the same period bond investors earned just 1.0% p/a compared to the Barclays Aggregate Bond Index return of 6.9% p/a. The trend continued in 2011 with the average equity investor underperforming the S&P 500 by 7.9%*.
These results highlight how investors too often allow emotion to drive their investment decisions and reinforces the importance of discipline when investing for the long term, particularly during periods of market volatility.
It is our experience by capturing the market return clients will almost always achieve their objectives if they avoid the temptation to try and pick the “best stocks” and the “right time”, and they maintain a well thought out strategy avoiding “BBQ talk” and “media hype”.
*Source: Larry Swedroe, Buckingham Asset Management, March 2012