Key Points from Canada’s 2024 Federal Budget and Strategies for our clients. Click Here.

Focus on own personal investments

Focus on own personal investments

August 28, 2014

Some investors may not be doing as well as expected because of misleading information in the investment business.

This isn’t intentional but no effort is being made to inform on the possibility of incorrect information.

Investors are being misled about the performance of their own investments when they see the stock market’s performance numbers and how well the mutual funds they own have done based on gains over a specific period.

Most, however, don’t pay close attention to how well their own investments are performing. This may be due to both the investor’s lack of interest and poor investment reporting.

Many stay informed by listening to occasional data that is being released. For example, they might hear that the stock market has increased by a certain amount over the last few years.

Had they invested during that time they may have a confident but misguided feeling of assumed success. General industry performance information considers that you were invested during the entire period.

Many, however, attempt to micro-manage their investments by buying and selling because they feel they can make money in the stock market.

They sell when they hear bad news they believe will affect the stock market. Or, as the market begins to decline, the investor uses a defensive strategy selling the stocks and putting the money into a safe and low paying investment.

Simply put, some investors make a good investment in stocks that have a history of doing very well over time. Then they sabotage their effort by moving in and out of the market.

This resembles a “bait and switch” exercise where the investor is shown something of good quality but ends up with something of lower quality.

Yes, the stock market has done well during the last hundred years, but when you are in and out of the market you get an entirely different result.

Attempts to time the market in most cases have produced extremely poor performance results. That is why there is a saying that the markets do well and investors do not.

We have information from the Investment Company Institute, a U.S. association, clearly illustrating that investors’ actual performance is not as good as it should be. Many times the market and as a result have poor investing results.

Leading up to the stock market decline in 2008, U.S. investors were investing more funds in the market than they withdrew. Then the stock market plummeted in value.

Those who remained invested have been rewarded with significant gains over the last five years. They have recovered their losses and made substantial profits.

Unfortunately U.S. investors were net sellers of mutual funds during the last five years while the market was doing extremely well. U.S. mutual funds had $535 billion of outflow between 2008 and 2013.

More money was leaving than was being invested at a time when the market was increasing in value.

The conclusion individuals would make is that they could do the same. But human behaviour shows that there is likely going to be continued market timing by investors.

History will repeat itself as many investors will fail to achieve those same results. A fund company will show how well the fund has done over the last several years.

Should they add a disclaimer to their advertised performance numbers saying that the tendency of individuals is to time the market and warn that returns will likely be lower than if they had stayed invested?