Investors: the Biggest Threat to Their Own Returns

Lack of choice is no longer the obstacle to investment success; lack of discipline is

Morningstar 18 August, 2016 | 1:15PM
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There’s never been a better time to be an individual investor in terms of choice, cost, and safeguards. The range of investment options offered to investors has never been so great and the pricing has never been so transparent or so low. The toolkit available to even the humblest of investors dwarfs that that the most elite professionals had 20 years ago.

In a very real sense, the playing field has been levelled. Improved access has not been coupled with increased enthusiasm, however. While the tools are available, the benefits of using them strike many as being greatly diminished compared to past decades. Bonds offer anaemic yields and seemingly little upside. Equities seem reasonably valued with few absolute bargains. The only generally agreed to be cheap area is emerging markets, and investors who have been dipping their toe there have been repeatedly punished in recent years as this statistically inexpensive area has fallen further.

Damaging Memories of the Global Recession

Compounding the problem are the lingering aftershocks of the financial crisis. Despite magnificent gains in developed market stocks, the trauma of steep losses during the crisis has scarred many potential investors, who, having missed the rebound, now feel little appetite to re-enter the fray.

The press and many politicians continue to vilify the financial-services industry and perpetuate the myth that investing is something only the wealthiest 1% can do, thus causing even more investors to stay on the side-line. In short, these are the times that try investors.

Amid this gloom, Warren Buffett’s comments at the annual Berkshire Hathaway meeting struck a wonderful counterbalance. Buffett sees not only the stunning progress of the past century, but also great opportunities still ahead. In one insightful observation, he notes that the average American today enjoys a higher standard of living than even the richest industrialist of a century ago in terms of our access to comfortable and speedy transportation, entertainment, and communications.

If only more of us could maintain Buffett’s wise perspective, surely our investment results would improve.

How to Be a Better Investor

How does one make sense of the reality of progress and the pervading feeling of lessened opportunity? More generally, how does an investor see beyond his or her short-term emotions in order to make wise investment choices?

I think part of the answer must be to take our personal feelings out of investment implementation and put as much of our investing on autopilot as possible. When it comes to market timing, and taking contrarian bets, investors can be their own worst enemies.

And as advisers guide most of the investments that generate those results, it’s clear that advisers themselves are subject to the same human emotions that undermine our collective investment results. Lack of choice is no longer the obstacle to investment success; lack of discipline is. If we can take the human element out of making regular contributions, out of rebalancing, out of selling high and buying low, then we can improve our investment experience.

We have met the enemy, and it isn’t the investment industry, or the press, or whichever political party you dislike. It is ourselves. A good financial planner is a valuable ally, but advisers, too, are human.

That’s why the best advisers will work with you to take both you and them out of the day-to-day business of implementing your plan. They will set up automatic withdrawals and contributions, automatic rebalancing, and in so doing take the person out of your personal finances. The greater distance we put between our emotions and our actions, the better we will fare.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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