DALBAR is the leading financial services market research firm in the United States. The company provides great insight into individual investor behavior.
A recent study from the company serves as a reminder to all Minnesota stock market investors. The conclusion of the study was clear. Individual investors should work hard to keep their emotions out of stock market investments.
From 1993 to 2012, the average U.S. stock mutual fund returned 8.6% annually. During the same time period, the average U.S. stock mutual fund investor earned 4.3%.
You read that correctly. U.S. stock mutual funds had much better investment performance than the individual investors who bought the same mutual fund.
How can that be possible? The two main reasons for the large investment performance gap are fear and greed. These two basic human emotions are the worst enemies of individual stock market investors.
Individual stock market investors put all their stock market money in the latest and greatest top performing mutual fund. This investor behavior is especially true of individual company 401(k) retirement plan participants.
When the stock market is rising, a single mutual fund investment strategy will be successful. Greed takes over reason in good stock market times. Individual investors think that the stock market will go up forever.
When the stock market direction changes, most individual investors panic and sell at the wrong time. Selling a good mutual fund at the wrong time takes a big bit out of individual investor stock market returns.
If you own a good stock mutual fund in a good stock market, you should continue to own it. When the stock market pulls back, a good mutual fund will hold up better than the overall stock market.
The key investment point is to own a good stock mutual fund in the first place. When the stock market risk level changes, you need to change along with it.
Greed is good. And it is fine to have fear once in a while. When these two emotions are combined in a bad mutual fund the combination is never a successful long-term investment outcome.
Ric Lager
Lager & Company, Inc.
