Investor Behavior and the Cost of Waiting

When I talk to anyone on the subject of investing and the markets, the question I most often hear is “when will there be a correction?” For some investors, this has been a nine year wait.  This is the result of two mistakes investors often make.  The first is thinking you can time the market.  This is a fact that has been well documented.  In Dalbar’s annual report Quantifying Investor Behavior, their analysis shows that the average investor under performs the S&P 500 by 4.70%.   The Dalbar report says that fear causes investors to withdraw investments and miss out on potential gains.  The Dalbar report also notes that investors have a tendency to buy high and sell low.

The other  mistake investors make is failing to understand that investing is not an all or nothing proposition.  Many investors think they are either “in” or “out” of the market. For them, there are no varying degrees of risk available to invest.  If investors knew they could choose a lower risk, defensive or tactical strategy they could get better results than if they switched between cash and a passive index that tracked the S&P 500.

What’s the solution? Reliance on a financial advisor is a start.  Advisors help by preventing investors from making bad decisions. Investors could also employ tactical or defensive strategies in their portfolios.  Investments that offer some return with downside protection are better than switching investments based on how we feel at the time.  Lastly, educate yourself.  Know what you own and why you own it.  If you are going adopt a tactical strategy yourself, have a plan.

INVEST is not affiliated with Dalbar its affiliates.