Self-destructive investor behavior continues

Emotions can wreak havoc on an investor’s ability to build long-term wealth. This phenomenon is well illustrated each year when the research company Dalbar Inc. releases its study of investor behavior.  While this is a study of American market data, I have seen similar results for Canada and as always, people are people whether they live north or south of our border.

Dalbar found that over the most recent 20-year period, from 1991-2010, the average stock fund returned 9.9% annually, while the average stock fund investor earned only 3.8%.

Why did investors sacrifice almost two-thirds of their potential return? Driven by emotions like fear and greed, they engaged in such negative behaviors as chasing the hot manager or asset class, avoiding areas of the market that were out of favor, attempting to time the market, or otherwise abandoning their investment plan.

Great investors throughout history have understood that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive investor behavior.