The Investor vs. Investment Gap

In 2004, an intensive study was conducted on investor-investment behaviour. For the period of 1984-2004, a U.S. mutual fund had an average annual return of 10.7%. What’s alarming is that during this same time period the average mutual fund investor enjoyed an annual return of only 3.7%.

It doesn’t take a math whiz to see that 7% seems to be missing.

This study still rings true today for a very simple reason: Investor Behaviour.

As humans we naturally gravitate toward wanting to “do better”. All too often we chase the idea du jour, claim this is better, that doesn’t work anymore, my neighbour made money doing it that way, the end of the world is upon us, get me out, etc.

Fear and greed rule the day.

All too often, we get caught up in the “fund of the year” or growth is better than value or technology is better than large cap or Europe is toast and there is a solution. It is a very simple, diversified portfolio, adjusted just once a year back to its original asset allocation that would likely outperform 90% of your neighbours' investments.

Most investment advisors get caught up in their analysts daily, hourly and by the minute predictions. No one can accurately predict, economies, sectors, regions, stocks, interest rates, etc. every time. If we concentrate on the one factor we can control – our behaviour – we don’t need to focus on the minutiae.

In his latest book Behavioral Investment Counseling, Nick Murray outlines three principles and three practices which will put any investor in the top ninety percentile of long-term real-life returns.

Principle: Faith
We have to believe, as it has always happened in the past, our only true test, that life will go on and that it will get better over time. It always has and always will.

Principle: Patience
It takes patience to wait through all the fads and fears constantly being thrown at us from all the talking heads in the media.

Principle: Discipline
In order to fend off the daily rhetoric you must continue to deposit money to your plan on a systematic basis, the discipline to stay the course when naturally we want to say “this time is different”.

Practice: Allocating Your Assets
Ninety-three percent of all investors’ returns can be attributed to Asset Allocation. This is the long term mix in a portfolio of stocks, bonds and cash. The proportion of each of these has the largest impact on your return (if you have the right behaviour).

Practice: Diversification
We must be certain we are not under diversified, but equally important not to be over diversified either. I like to think this as idea diversification.

As an example, in 1999 Technology was the big thing. Dot.coms and IPOs were happening at the speed of light however there was little financial of business foundation beneath much of this activity. If your portfolio was rich in tech stock in 1999, how did you fair by the end of 2001?

If you had divested your money in 1999, you would have softened the blow by more than eighty percent two years later.

Practice: Re-Balancing
This is the easy part. A year after you have set up a portfolio, revisit it to ensure you are still in the same weighting as you wanted to reach your financial goals. This should be done each year at the same time. This practice will automatically force you to take your winners and feed your losers, which will in turn increase your long term, real-life returns, and make them better than even the returns of the investments themselves.

Let’s continue the conversation.

Email me any time patrick@nicolandassociates.ca

Nicol and Associates | May 2010

Each month I highlight 2 business owners that I have met in person to hear their story in how they help people and run their businesses. I send it out to my clients, to remind them that I can help them in more ways than just their investments. This months recommendations are below.

LIAM SWORDS – Sales Representative, Royal Lepage Team Realty

The Liam Swords Team is a team of high-energy professionals that are dedicated to giving you a higher level of service! When you choose to work with Liam Swords, you not only get a highly experienced sales representative with a comprehensive knowledge of real estate, you get a team of highly skilled professionals who will work with you personally to ensure the buying/selling process is as stress free as possible.

We provide a full service package including home staging and professional photography to get your listing on in the shortest amount of time looking it’s very best! We are always available to answer any questions you may have with no obligation whatsoever!

AMANDA O’REILLY - Balance InStyle – Weddings InStyle – Events InStyle

Who are we? Balance InStyle came to be in 2007 after losing a good friend to Breast Cancer and I realized the real need in our community for the types of services that we are offering.

We are the first in Ottawa to provide lifestyle management solutions from leisure to luxury all the way down to the routine and mundane. We support you by taking care of an array of time-consuming daily tasks that could be weighing you down. Concierge services are today’s solution to today’s busy lifestyle. We help you organize anything that you do not have the time or the patience to do yourself. We have created a model to give relief to the growing population of the overburdened and time starved.

We personally guarantee that all of our vendors have the Balance InStyle seal of approval! We require everyone that we do business with be licensed, insured, and bonded where applicable. We always verify references and personally test drive each and every one of our vendor’s services to ensure that they are providing the quality of service that we are proud to recommend to our clients.

Weddings InStyle is the intimate alternative to weddings in the capital. Regardless of the size of your ceremony we will help you celebrate InStyle. Weddings InStyle is the new chic, hip one-stop wedding destination, conveniently located at 107 Murray Street in the heart of the Byward Market. Our 2000 sq. ft. intimate, well-appointed, modern space is the most unique wedding venue in Ottawa – a great alternative to the typical, non-descript, already-been-there-for-your-friend’s-wedding feeling most of the Ottawa banquet rooms, hotels, catering venues and City Hall offer.

Events InStyle: Hosting your event at Events InStyle means your special function is guaranteed to be unique, chic and sleek in our modern and versatile venue at 107 Murray Street in the heart of the Byward Market.
Events InStyle’s setting offers a blank canvas upon which we work with you to create whatever look and feel you desire – modern, urban, romantic or elegant. Our 2000 square foot open concept event space features exposed brick walls, hardwood floors, granite bar, attractive lighting, state-of-the-art audio and stylish decor to suit any event.

If you would like to be featured or would like to hear more about these great businesses, please contact me.