Fundamental to our investment philosophy at Initiative is a study known as the ‘Dalbar Study’. The original Dalbar Study was conducted between 1980 and 2000 in the USA on the top 500 US listed companies. The study found that the average return for the 500 companies over that 20-year time period was 12%, which is a great average return. However the average return realised by investors in the US market over the same 20-year period was around 4%, which is a very poor average return over the same period. The study continues to be published annually with disturbingly similar results reported each year.
The number one reason for the 8% difference was bad investor behaviour. Investing in shares is a long-term investment strategy. The Dalbar Study found however that the average holding period by investors (who all said they were investing for the long term) was just over three years. Those investors made bad short-term decisions based upon various events happening in the world at the time. Analysts have determined that the behaviour of investors in the US share market is generally identical to investors in the Australian market.
So what happens when people invest?
People get excited when the share market goes up and invest to get in on the action, however generally they are getting in too late and have missed most of the gains. When investment markets are down, we have the media striking fear into the investment world prompting bad investor behaviour, so uneducated investors sell out of the market turning their shares into cash, often at the lowest point. When the market starts to look good again and is going up, these same investors buy back into the market when share prices are high, missing the opportunity to purchase shares while prices are low, and so the damaging cycle continues. Due to this bad investor behaviour, shares are sold when they should not have been sold and bought when they should not have been bought. That’s how investors can potentially tear up 5-8% of their portfolios every year.
Investment results are far more dependent on investor behavior than on share performance. Investors who hold on to their investments over time have been proven to be more successful than those who try to time the market.
So how does our investment philosophy help prevent bad investor behaviour?
To prevent you making these mistakes our role as financial advisers is to provide you with a sound investment philosophy, strategy and process, so that you will continue to hold your investments and ride out market volatilities in the midst of down markets and negative media broadcasts. It is critically important to keep in mind longer-term objectives and goals, and not be influenced by inevitable short-term events, which affect investment markets.
James Mulhearn CA – Director