“DALBAR’s Quantitative Analysis of Investor Behaviour Study (“QAIB”) has been analysing investor returns since 1994 and has consistently found that the average investor earns much less than market indices would suggest. “
This has everything to do with emotions – investors, with the best of intentions are their own worst enemies when it comes to managing money. they get excited when the markets are positive, greed kicks in and there is an expectation that markets will continue to rise – that’s when many investors want to get into the markets. When markets retreat, as is the nature of the markets, pessimism kicks in and the expectation is that the free-fall will continue. Fear gets the better of investors and they lock in losses by selling their investments.
This is the effect – the returns investors make are significantly lower than what the market generates
How do you solve for this? Understand your risk profile. Secondly, get into the right asset allocation which seeks to manage your emotions. Once you’ve managed your emotions, there’s a higher chance of you staying invested. This, ultimately increases your chances of reaching your financial goals over the long term.