When you first start implementing your investment strategy one can sometimes be tempted to review the performance of the portfolio regularly in short-term intervals.
The problem is that a portfolio, which is designed to achieve superior long-term returns, may not perform so well in the short-term. You have to ask yourself: is it really important to measure the performance of my portfolio over a five-month period? Or is five years perhaps a more appropriate time frame? We're not saying "don’t look at it more frequently than five years." We are saying "don’t get too caught up with the short-term results, whether they are good or bad." By looking at your portfolio weekly, or monthly, you are expecting it to do something other than what it was designed to do.
The downside of reviewing performance in the short-term is that it pits your emotions against your intellect. And because we are all human these emotions can be quite persuasive and can lead us to make some pretty big mistakes. Whatever it takes, you have to keep your emotions out of the equation.
The discipline component is all too often overlooked when an investment plan is created. You can start to manage your emotions by first learning about and acknowledging the biases and cognitive errors that influence behaviour. We discuss these in more detail in our meetings and communications.
One challenge all investors face is dealing with the noise of financial media. In general, the financial media is not your friend. Many times their message is very short-term and can compromise one’s long-term focus. Never mind five months, they often make predictions for the next five days. The problem is that a lot of people want to believe there is some crystal ball approach that can help them find some opportunity that no one else can. This sells newspapers - but does little for an investor’s long-term success. The financial press in general is in the entertainment business - not the knowledge or wisdom business.
In reality, markets are quite simple and they work over time. Again, it’s the business columnists, the financial media who make them appear complex. Capitalism works, and by owning good companies you can share in that growth. However, you must keep a long-term perspective and consider your investment horizon before determining your performance horizon. In other words, you have to look at how long your portfolio is going to be invested when deciding the time frame you are going to use to evaluate its performance.
Boston based research firm Dalbar found that for the 20 years ending 2011, the average investor investing in U.S. equity mutual funds had an average annual return of only 3.49% (the investor return). Over the same period the S & P 500 returned 7.81% per year on average (the investment return). This difference can be attributed to a number of factors.
Why such a disparity in the results? According to the study the majority of investors either try to “time the market”, or they simply panic and abandon their long term plan. With market timing they are trying to capture the profits of the stock market on the upswing and miss the losses that occur when the markets go down by attempting to jump in and out at exactly the right time. The plan is perfect in theory but in reality cannot be accomplished with any degree of consistency.
We sometimes make decisions with our heart (or rather our stomach) instead of our head. While emotion may be all right in other life matters, it has to be avoided at all costs when looking at your wealth management plan.
In the end you have to be patient. Whether you are exercising, going to school or building a career – slow and steady is usually the best way to achieve the best results. Why would it be any different with investing?