Can Good Behavior lead to Investment Success?

October 21, 2020

In Part 2 of our series "Behaving Your Way to Wealth," we are exploring how Good Behavior can lead to Investment Success and Poor Behavior leads to a lifetime of lost potential wealth.

Perhaps no year since 2008 has tested the mettle of investors more than 2020 and for most, likely in their investing life. All of the good (and bad) emotions that lead to success in financial planning and investing have been challenged this year.

The first few months of 2020 we saw global markets rise to new heights, catapulting investor wealth to the highest point they'd likely ever seen, only to see it decline in one of the quickest bear markets in history.

The following chart demonstrates how human beings are not born to be good investors (but can be made) and why having a solid financial plan and coaching behind you puts the odds in your favor and the market your ally!

We can see how as wealth surged toward the end of 2019 and early 2020, we may have all felt euphoria or 'giddiness.' Then, as the markets reacted to the events unfolding around the Covid-19 pandemic, markets declined quickly, leading to the natural emotion of fear and wanting to panic sell.

Countering these emotions are what ultimately leads to investor (and financial) success.

Nick Murray once stated: "Wealth is not determined by Investment Performance, but by Investor Behavior."

Now, as global markets have begun to recover, investors have displayed signs of euphoria, fearing they are 'missing' out, looking to buy the hot asset class that has 'performed the best,' and other misbehaviors that lead to the Investor Behavior Gap.

Studies conducted by Dalbar on investor behavior and performance indicate a "behavior gap" of almost 2% per year! What this means is that investors may be missing out on almost 2% of potential gains lost due to underperformance each year from human behaviors and mistakes, such as timing the market, moving to cash out of fear and chasing the latest hot asset class. The gap may be even wider if we factor in taxes, fund costs and a poorly allocated investment portfolio!

Dalbar's continued studies, as well as many other studies available, indicate that over 90% of expected performance of an investment portfolio is from your unique Asset Allocation plan. Put another way, what you own, how much of it you own and your capacity to hold that investment plan through the inevitable ups and downs determines much more of your performance than timing the market or owning the 'hot' asset the TV or a neighbor tells you to own.

We believe an informed investor is an empowered investor. In today's 24-7 age of 'always-on' media, there is much noise to cut through to get to actionable and relevant information that benefits you and your family. As always, if you have any questions don't hesitate to call or stop by. If you feel we can be of service to friends and family, pass our names along.