It has been said that golf is a simple game but not an easy game, and the same could well be said of investing. History shows that the stock market has always rewarded investors who were well-diversified and invested for the long-term, and yet most investors do not enjoy those rewards. A 2013 study by Dalbar, Inc. revealed this disconnect; it showed that, during the 20-year period from 1994 – 2013, the stock market enjoyed an annual return of 9.22% per year. Meanwhile the average investor earned only 5.02% a year.
So if the path to investment success is so simple … why do so many investors deviate from that path?
In a word: Emotion.
Investors fail to appreciate the nearly insurmountable pull that emotions have on their investment decisions. In booming markets such as the dot.com bubble in the late 1990s, the dominant emotion is greed. In periods of market turmoil, such as the financial crisis of 2008-09, the dominant emotion is fear. Both fear and greed are the enemies of investment success, because they cause investors to make short-sighted decisions that deviate from their long-term investment plan. And those short-term movements end up costing investors as a group billions in lost returns year-after-year – returns that were there for the taking.
We believe, therefore, that one of the key responsibilities of an outstanding wealth manager is to be the emotional barrier between clients and their money. To create a prudent, well-diversified investment strategy appropriate for the client’s needs, and then act as a voice of calm reason during periods of market extremes to make sure there are no emotion-driven deviations from that strategy. This will help ensure that our clients are in the market, all the time, to enjoy its long-term rewards
To minimize the investor’s emotions, we believe an outstanding wealth manager must minimize unnecessary volatility. And that is why at Capital Directions we employ the tenets of Modern Portfolio Theory as our investment strategy.
Visit our commentary section for our take on a variety of finance-related topics.
> Read more