Investor Behavior

Apr 17, 2013

As much as we'd all love to be able to time the market, the chances of that actually happening are slim to none. Good returns are a by-product of a good strategy and you can only stick to a good strategy if you take your emotions out of the investment decisions.

The basic principle of investing is to buy low and sell high. Unfortunately, investors tend to hear about the latest trend and decide to buy in, and on the flipside, when the market is going down; they may get scared and sell their position. This emotional behavior can result in buying high and selling low, the exact opposite of their goal.

The chart below is a great example of the negative impact that emotional decisions can have on an investor's portfolio.


Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (July 2008) and Lipper. Dalbar computed the "average stock fund investor" returns by using industry cash flow reports from the Investment Company Institute. The "average stock fund return" figures represent the average return for all funds listed in Lipper's U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of a "systematic investor" and "asset allocation investor". The annualized return for these investor types was 5.8% and 3.5% respectively over the time frame measured. All Dalbar returns were computed using the S&P 500® Index. Returns assume reinvestment of dividends and capital gain distributions. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.  Past performance is not indicative of future results. You cannot invest directly in an index.  This example does not factor investment costs.  If it did, results would be less.

In order avoid such a high disparity, you should seek advice from a financial professional. You can think of financial advisors as a financial "coach." We help you stay on track with your goals and can provide the economical data that helps turn otherwise very emotional decisions, into more calculated options.

Written by Kristin Brandli, Financial Advisor
North Star Resource Group 

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