Investment portfolio returns – could YOU be the problem?

21 Oct 2014

By Andrew Bollen

Over the years many people spend untold hundreds if not thousands of dollars to hire, fire and re-hire investment managers whom they perceive as being the best and most successful. But could it be that investment success is not just about the skills of the manager? Of far more importance is the behaviour of the investor.

Whether you are aware of it or not, emotion plays a huge role in the financial decisions you make. It can determine your success or failure as an investor.

Typically, emotion seems to gain the greatest amount of traction in times of market excess, either when the market is reaching a new record high each day, or when the market has crashed and all of the so called "experts" tell us it will never recover.

It has been said many times that world sharemarkets are driven by fear and greed.When the market is reaching a new record high each day (as it seems the US Dow Jones Industrial average is at present), the emotion of greed can easily take over. It can be hard to ignore the comments of friends and acquaintances regarding how much someone else's portfolio made last year. Many investors, being driven by greed and not wanting to miss out on returns, pile more and more money into the latest "hot stock".

History has shown that in these times of sharemarket record returns, there are also record inflows to equity funds. What does this mean? It means that when the market goes up and is at a historical high point, on average, investors are driven by the emotion of greed and consequently buy more equities. They "Buy High".

Conversely, during times like the Global Financial Crisis in 2008 and 2009, when more than 50% had been wiped off the "paper value" of the Australian sharemarket, investors were typically driven by fear. They fear that markets are bad, and likely to get even worse. Again, history has shown that on average, during a sharemarket crash, there are record outflows from equity funds. So what does this mean? Well it shows us when the market is down and potentially nearing its low point in the cycle, investors who are driven by fear, on average, sell equities. In other words they "Sell Low".

Commonsense tells us that in order to make money in long-term investing, we need to buy low and sell high, however history has shown that on average, investors do the opposite. The illustration below, from Carl Richards of the Behaviour Gap, puts this quite clearly.

Greed diagram

The digital image is owned and copyrighted by Behaviour Gap and/or Carl Richards.

It is at these very high and low points of the market that a relationship with a financial adviser is essential to ensure that the achievement of your long-term goals and objectives, rather than emotion, is the driving force behind your investment portfolio decisions.

To learn more about Andrew, view his online profile.

Educational guides