Markets do fine over time… but many investors don’t


As the year turns, investors are bombarded with predictions about what 2017 may hold. Soothsayers will suggest strategies to avoid the next crisis or how not to miss the next great opportunity. Contrary to these appeals, research indicates that investors are well-advised to stick to their long-term plans, rather than change course in reaction to short-term excitement.

Since 1994, Dalbar has published an annual Quantitative Analysis of Investor Behavior study. The stated goal of the study is to is to improve performance by managing behaviors that cause investors to act imprudently. In analyzing investor returns, their key findings are consistently that investment results are far more dependent on investor behavior than the performance of the underlying investments. Poor decision-making by investors, such as buying and selling at the wrong time due to emotions, being under-diversified, following the herd, or over reacting to news, damages returns. For example, at the end of 2015 the 20-year annualized S&P 500 index return was 8.2% but only 4.7% for the average stock mutual fund investor. That is a striking gap of 3.5%. The bond return gap is even worse, at 4.8%, with the Barclays Aggregate Bond Index and average bond fund investor returning 5.3% and 0.5%, respectively.

Within the context of a long-term investment plan, investors are likely better served by trusting their well-built investment plans, designed to achieve their goals. Rather than knee-jerk responses to markets, which can’t be controlled, investors can benefit from focusing on what they can control, such as saving appropriately, being flexible in their withdrawals, global diversification, keeping cost low and minimizing taxes (where applicable). Investors who make changes to a long-term investment strategy based on short-term noise and predictions may be disappointed by the outcome. History has shown that although markets are uncertain in the short-term, markets have rewarded long-term investors who are able to stay the course.

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