YOU ARE THE BIG­GEST RISK TO YOUR IN­VEST­MENTS

Weekend Argus (Saturday Edition) - - GOODPUZZLES -

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.

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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