The Disciplined Investor
By: Richard Convy
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
Why is it that the typical individual investor never seems to do as well as the market? The answer is simple; most investors cannot control their emotions and as a result engage in self-destructive investor behavior. The individual investor buys when the investing environment is strong and prices are high and then sells when the environment is weak and prices are low. Historical studies of investor behavior support these findings. A recent study by Dalbar (Quantitative Analysis of Investor Behavior, March 2012) found that from 1992 to 2011, the average stock mutual fund returned 8.2% per year while the average individual stock mutual fund investor returned only 3.5% per year. Why the difference? The average investor engaged in self-destructive behavior driven by emotions of fear and greed. Investors engaged in destructive behaviors such as pouring money in to the latest asset fad, or trying to time the market, or avoiding the areas of the market that have performed badly expecting that this poor performance will continue indefinitely.
So what is the latest self-destructive behavior that many investors are doing now? We at AAFMAA Wealth Management & Trust believe that investors have abandoned stocks in favor of bonds. This behavior is a mirror image of the mistake that investors made during the period 1998 – 2000. During that period, investors clamored for stocks, especially internet stocks, and shunned bonds. Everyone wanted stocks, no one wanted bonds. Today, it is just the opposite; investors want only bonds and are ignoring stocks. This can be seen in the large differential in money flows between bond funds and stock funds. According to the Investment Company Institute, between January 2008 and December 2011, investors poured $780 billion into bond funds and withdrew $401 billion from stock funds. What were investors doing during the year 2000 just as the market was peaking? You guessed it; they poured $260 billion in to stock funds and withdrew $450 billion from bond funds.
So are we saying that investors should sell all of their bonds and buy stocks? No, we are not. We’re saying investors need to determine what their target asset allocation (the mix between stocks, bonds, cash, etc.) should be and keep to that allocation. Only through a disciplined investment approach that includes rebalancing by selling out-performing areas of the market and purchasing under-performing areas can investors obtain long-term wealth. Succumbing to emotions and engaging in self-destructive behavior such as avoiding a specific asset class will not result in long-term investing success.
For more information on how AAFMAA Wealth Management & Trust can help you with Financial Planning, Investment Management, and Trust Administration, contact us at:
- (910) 307-3500 for our Fayetteville, NC office
- (703) 707-8020 for our Reston, VA office
Information provided by Richard Convy, CPA, CFA. Richard is the President of AAFMAA Wealth Management & Trust LLC, a North Carolina Limited Liability Company, wholly owned by AAFMAA.
This post has been prepared by AAFMAA Wealth Management & Trust LLC, a division of AAFMAA and is provided for informational purposes only and does not constitute, and is not intended to constitute, the giving of advice or the making of a recommendation. No person is authorized to use this document for any purpose other than the purpose stated above. Any opinions or estimates contained herein are subject to change without notice and are not a guarantee of future events or results. Information contained in this document has been obtained from sources believed to be reliable but there is no guarantee of such. This document is not intended to be used as a substitute for the exercise of independent judgment.