Eureka Report: How your behavioural traits canlead to substandard returns
For many of us, the ability to retire comfortably and to see out the rest of days without financial stress or strain rates highly on the list of concerns.
This is particularly heightened as the exit from the workforce approaches, during periods of higher market volatility and as the legislative landscape continuously shifts, blurring the visual of the road ahead. The future is by its very nature an unknown and there will inevitably be a multitude of factors – both financial and non-financial – that cannot be pre-empted.
Experience has shown us however that investors who keep focus on the bigger picture and on controlling the controllables stand a greater chance of living out their best potential.
Here are the cornerstones:
Putting goals first
Goal setting not only reminds us why we are investing in the first place but creates the very framework for our investment life. As stated by Lewis Carroll, “If you don’t know where you are going, any road will get you there”.
To get the most out of the exercise it is important to first develop a clear vision of the ideal future you would like to create. There are, of course, no boundaries or limitations on what might form your “why” – be it family related, travel, philanthropy, lifestyle and the list goes on. Together with the well-documented link between writing goals down and success, specificity is also an important factor.
Studies by American psychologist Edwin A. Locke have shown an improvement in the success rate where the goals are more specific in nature and ambitious, as compared to those which are general or seemingly easy to achieve.
Once the destination is defined with clearly articulated objectives at the core, then the pathway to best arrive there can be mapped out. This can be a daunting exercise given the potential multitude of moving parts. An advisor or financial coach can assist in working through what is achievable, breaking the vision into actionable steps and importantly tracking progress periodically.
Get the behaviour advantage
As human beings, we are subject to a range of cognitive or psychological behaviours which can go a long way to explaining why our financial decision making can at times be less than rational. As famously stated by Benjamin Graham, “The investor’s chief problem and even his worst enemy is likely to be himself.”
A study by US company Dalbar shows that in the 20-year period ended December 2014, the S&P 500 market index delivered a return of 9.85 per cent per annum. The average investor, however, achieved a return of only 5.19 per cent p.a. (source Dalbar - Quantitative Analysis of Investor Behaviour 2015). That's right – almost half.
The astounding differential is measured by assessing, in the US context, the various flows in and out of managed funds, therefore the impact of emotion-based decision making, chasing winners and market mistiming. Had the investor simply stayed the course and applied a discipline and consistent exposure a substantially better result would have been achieved making a marked difference over time.
The difficulty here is that a successful investor must at times swim against the current of their inherent biological nature and remain invested through difficult times. Perhaps, just as anti-predator adaptations in the animal kingdom act as the first line of defence, we are predisposed to react in a manner which often contradicts good long-term investment. Understanding and arresting these tendencies can have a significant impact and mean a very real and tangible advantage.