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You are the biggest risk to your investments

Financial Planning

Many investors do not realise that they may be the biggest risk to their investment portfolio, Nick Pawley, a wealth analyst at AlphaWealth, an advisory firm for high-net-worth investors, says.

Pawley says Boston-based research firm Dalbar recently released its 20th annual “Quantitative analysis of investor behaviour” review. The study observed individual investor returns over a 30-year period from 1984 to 2013.

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The findings show that individual investors are poor decision-makers, and, despite multiple bull and bear markets over the period, did not learn from their previous mistakes.

According to the review, the Standard & Poor’s 500, the most widely used stock index in the United States, returned 11.11 percent over 30 years, 9.22 percent over 20 years, 7.40 percent over 10 years and 17.94 percent over five years. But, on average, investors’ returns were 3.69 percent, 5.02 percent, 5.88 percent and 15.21 percent respectively.

In an unrelated study, Fidelity Investments conducted research on their Magellan Fund from 1977 to 1990. The average annual return during this period was 29 percent. However, the study found that the average investor in the fund actually lost money, Pawley says.

He says human psychology is to blame, because investors chase the returns of the best-performing mutual (unit trust) funds, which gets them nowhere.

The performance of investment themes come and go, but you, as an investor, need to be patient, ensure you are well diversified, and that the expected risk versus return is in your favour, Pawley says.

Many “do-it-yourself” investors are navigating financial markets on their own, with little time to decipher the importance of what they are reading or hearing, Pawley says. Being able to lean on an adviser removes at least some of the behavioural biases involved in investing, giving you time to focus on what matters in life.

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