Hey, investors… you’re doing it wrong! Since 1994, DALBAR has released an annual study known as the Qualitative Analysis of Investor Behavior (QAIB). This study measures the effects of investors’ behavior and how this behavior impacts their investment performance. There is an abundance of research that shows that investors are often their own worst enemy when it comes to their portfolio returns. This post will detail the main findings of the most recent QAIB study, explain some of the common behavioral mistakes investors make, and let you know what you can do to avoid these mistakes.
The DALBAR study continually shows how big a role behavior plays in how successful you will be as an investor. Hey, investing is difficult! There are many negative behaviors that can lead us to react emotionally and, ultimately, make poor decisions. These negative behaviors and decisions can lead us to stray from our investment strategy and rob us of long-term performance.
These negative behaviors include:
- Loss Aversion – expecting to get high returns but taking minimal risk
- Herding – similar to “mob mentality”; following others even when facing unfavorable outcomes
- Narrow Framing – making decisions without looking at the whole picture
- Media Response – reacting to headlines and “noise” without reasonable examination
- Optimism – thinking good things will happen to me even when bad things happen to others
Results of the Study
The behaviors above lead investors into making market timing mistakes. Market timing is convincing yourself to buy and sell, often at unfavorable times, which leads to under-performance. Just how much do behavioral mistakes rob you of performance? In 2015, the average equity (or stock) mutual fund investor under-performed the S&P 500 by 3.66%. Over 20 years, the difference between investor return and S&P performance is an under-performance of 3.52%. The 20 year under-performance from fixed income (bond) mutual fund investors compared to their benchmark is 4.83%. This is a really big deal! These gaps in performance drastically reduce the growth potential of your retirement savings over time. This can add up to hundreds of thousands of dollars.
How Can You Avoid Making Behavioral Mistakes?
Work with an advisor that does comprehensive financial planning. Don’t just invest for retirement, plan for it. Financial planning will take into consideration your unique goals and then custom tailor an investment strategy that is aligned with those goals. A sound planning relationship will involve continuously reviewing your plan and making sure that your investments are still on track and supporting your goals. This will also allow your advisor to act as an accountability partner for you to help you understand short-term volatility while also preventing you from making behavioral mistakes. Don’t self-sabotage your financial future. Remove the guesswork from your financial plan today!