That’s right. We believe these are proven ways to let your emotions screw up your returns.
Every year since 1994, Dalbar had produced a chart (like the one below) showing how much investor behavior plays a role in investor performance.
The figures change from year to year, but the spread between investor returns and their investment returns remains shockingly great. The difference was nearly 4% per year for the 20 year period ending 12/31/2012.
Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (April 2013).
So here’s what (not) to do:
- Buy individual stocks
Just because you have a ‘feeling’ about a company doesn’t mean you can predict the future. Try this once with success and it could lead to even bigger failures because of your own overconfidence. Investing should be about reaching a financial goal, not about hitting a home run stock pick.
- Time the market
Selling a stock mutual fund out of sheer panic (what did you do in 2008?) or buying because you are afraid you might ‘miss the boat’ (tech stocks in 2000) have to be the most common missteps.
- Decide that things ‘have to change’ or ‘will never be the same’
The financial media is great at stirring up your emotions, and they may leave you with a knot in your stomach. How many earlier headlines are now distant memories? Is anyone still talking about the fiscal cliff? Investing should always be a long-term endeavor for those with time to wade through the ups and downs. In the long run, the stock market has risen because of companies finding ways to increase their profits and earnings – period.
- Work with a commission broker
If your investment pro makes money every time you buy and sell, it may not be good for you. Making sure you have the latest or most exclusive investment does not constitute a long term financial plan.
- Hire a national advisory firm with a call center or an online only firm
We believe the best advice will likely only come from someone you have met with to listen to your goals, values and future plans. In our opinion, a great advisor should know what all of the effort is really about and why it is important to you.