Bad Behavior
“We have met the enemy and he is us.”
That’s the famous quote from Walt Kelly, cartoonist who drew the Pogo series.
It applies especially to investors. A study by the financial consulting firm
Dalbar showed that for the 20 years ending December, 2010, investors achieved
less than half of the return for the mutual funds they participated in: 3.83
percent a year for investors versus 9.14 percent for the funds. Why is this? In
large part because investors let emotions dictate their actions rather than put
thought into what they are doing. They let fear and greed dictate buys and
sells. Recently we sponsored a talk on a behavioral approach to investing. The
speaker, Jay Totten of Dimensional Funds, used recent research to show the
inherent problems investors have and how to counteract them. The problems he
cited included overconfidence, illusion of control and aversion to loss. He
suggested that one way to minimize these problems is to stick to a plan. He
recommends focusing on good decisions, not outcomes, and controlling what an
investor can control such as diversification. That makes it easier to accept
what happens, which is partly a matter of chance.