What our investment research is telling us
We carry out a lot of research throughout the year, whether it’s attending conferences and seminars, meeting investment managers and product providers and also carrying out desk-based research. Inevitably from time to time, our reading pile gets a little higher! However this is now a great time of year to make real inroads into that reading.
When scanning through some recent research, we reviewed again two particular articles that we’ve shared with you previously. Both of them are worthy of further comment and while the overall topic of each of them is different, they both in fact finish with similar conclusions.
The first piece that we wish to discuss is from Dalbar, who are a world renowned and independent expert for evaluating, auditing. and rating business practices, customer performance, product quality and service. The research that caught our eye from them is, “U.S. Investors Lost Twice As Much As The S&P 500 In 2018”.
The second piece is a superb infographic called “The Anatomy of a Market Correction” from Visual Capitalist.
So what have we learned?
First of all, the basic tenet of the Dalbar study is that investor behaviour has the single biggest negative impact on investment returns over time. Investors who continue to dabble with their funds usually end up seriously undermining the performance of them. This happens largely as a result of bad timing in entering and exiting markets. The last paragraph says it all, “year after year, the firm has found that investors are often their own worst enemy, failing to exercise the necessary discipline to capture the benefits markets can provide over longer time horizons, while succumbing to short-term strategies such as market timing or performance chasing as they did in 2018”. We see it time and time again – trying to time markets is simply folly.
The market correction research has a different focus. It examines the regular ups and downs of markets, with market corrections typically happening about once per year, with the impact of them felt on average for over 70 days. What happens then? Worried investors believe a full bull market (greater than 20% decline) is on the way and exit the market. But only 14% of corrections between 1980 – 2018 resulted in a full bear market, the rest were just blips on the radar. So investor behaviour gets in the way again…
The final section of the infographic is very interesting, comparing 3 investors, one who times the market perfectly, another who doesn’t try and time the market and a third who times it wrong each time. It’s not surprising that the third investor significantly lags behind the others in terms of returns. However what is surprising is the very small gap between an investor with perfect timing and one who doesn’t try and time it at all. It shows very little reward for market timing, which we’ve also seen is extremely difficult to get right!
So what have we learned overall? We take four lessons away from these pieces of research,
- Timing markets is folly and is not significantly rewarded even when you get it right
- Taking a long-term approach and relying on the efficiency of markets is usually the best strategy
- The key is to understand your goals and build your strategy around them, get your asset allocation right and then let markets get to work
- Accept there will be bear markets along the way
Follow these thoughts and you’re more than likely improving your prospects of investment success.