Investor vs Investment Performance¶

How Can The Driver Be Slower Than The Car He's Driving In?¶

If you compare the average speed of a driver in a car to the average speed of the car, how would it be possible that the two are different?

Here's how: a car traveling on a specific route usually moves at a rate of 60 mph, but our particular driver frequently takes breaks or second-guesses the pre-planned route and takes detours; thus his average speed is less than 60 mph.

Investors do the same thing: they invest in a mutual fund that averages ~12% over all ten year periods (such as the American Funds ICA), yet they only get a 10-year return of 6% because instead of investing and leaving it alone, they pull their money out when the market drops and re-investment when market is up (selling cheap and buying expensive).

Then they blame "the market", the mutual fund and even their Advisor. The driver is blaming the car or the pre-planned route instead of himself.

Take a look at the chart below which shows the average rate-of-return over twenty years of the driver (investor) vs the car (the investment).

In my 37+ years of coaching clients, I've found the differences between the investor and the investment to be much more pronounced, especially over longer time-frames. Most investors without a coach aren’t disciplined enough to stay on track (ie, staying in the market when it's down).

Why Do They Do This?¶

Why do investors "get out of the car" or go off of the planned route?

Fear and Greed.

Driven by these emotions, clients often engage in such negative behaviors as chasing the hot manager or asset class, avoiding areas of the market that were out of favor, attempting to time the market, or otherwise abandoning their investment plan.

Great investors have understood that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive investor behavior. This is where a professional advisor can help - preventing their clients from making the Big Mistake.

During periods of uncertainty, investors often gravitate to the investment media for insights into how to position their portfolios. While these forecasters and prognosticators may be compelling, they usually add no real value.

The Wall Street Journal Survey of Economists from December 1982 – December 2010, showed that economists’ forecasts were wrong in 37 of the 57 time periods – 65% of the time!

Every public trade that's ever been transacted since the 1800's is logged in a computer(s) somewhere, and if by now a pattern to the market hasn't been discovered, it isn't going to be.

Do not waste time and energy focusing on variables that are unknowable and uncontrollable over the short term, like the direction of interest rates or the level of the stock market. Instead, focus your energy on things that you can control, like creating a properly diversified portfolio and staying in it!

My best clients have understood that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive investor behavior (with my help).

Even If You Could Time the Market, It Doesn't Make Much of a Difference¶

The Solution: Do Nothing (Buy and Hold)¶

Stop watching and obsessing over the market! Doing nothing is often the best investment strategy. Let the market do what it is supposed to do. You can't control it anyway, so don't try!

We can only control our participation in the market, and our behavior while we’re in it.

The Antidote: A Professional Advisor¶

I am a long-term advisor serving clients with long-term goals. If a client is exhibiting short-term behavior or emotionally reacting to short-term market conditions, I need to have a serious discussion with him about his goals, and reassure him that a long-term perspective is the best perspective. My greatest value to my clients is my ability to influence their behavior in a positive way.