Blue Chip Journal - June 2019 edition

CLIENT COACHING
Meeting the challenge
of investor behaviour
Research shows investments outperform investors
Investor behaviour is a problem.
Arguably, investors are their own
worst enemies. US research company
Dalbar Inc. conducts annual research
to compare the return that investors get
versus the returns of their investments.
No matter the period of measurement,
the story is the same. The average investor
underperforms on their investments.
According to Dalbar, the magnitude of
underperformance is on average around
5% per annum. An extraordinary number.
Investor behaviour is a
perennial challenge
This is not a new phenomenon. As far
back as the 1600s people succumbed
to the so-called Dutch tulip mania.
They believed that there were untold
riches to be made from investing in
tulips. This ended with more people
in rags than riches. The argument that
society, including investors, was not
sophisticated back then is flawed. The
global financial crisis of 2008 was a
more recent case of deluded investors.
They believed property prices only
went up, and interest rates would
always be low. Bitcoin is a story that is
currently playing itself out. Investors
have been their own worst enemies
ever since humans stumbled on the
idea that bartering wasn’t the only way
to exchange value.
Investment results are dependent
on investor behaviour
Dalbar asserts that, “No matter what
the state of the mutual fund industry,
boom or bust: Investment results
are more dependent on investor
behaviour than on fund performance.”
Unlike other markets in which human
beings participate, investment market
participants tend to buy high and sell
low. The more markets rise, the more
optimistic investors become. The more
they fall, the more pessimistic they get.
This problem of investor behaviour has
been addressed by the industry with a
two-pronged approach: firstly, financial
education and secondly, applying a
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