By Scott Moser  

In past articles we have quantified the benefits that a qualified financial adviser can provide to individual investors. One of the benefits is termed investor behavior which is the tendency for investors to underperform the returns of the investment vehicles they select.  For example, if the investor buys XYZ mutual fund after noting it’s recent outstanding one-year performance results, the investor is likely to obtain below average returns going forward when that fund’s second year performance falls back to the mean. While the XYZ fund may have a great 2 year return, the new investor did not own the fund in year one and winds up with a return below what the fund is reporting. This represents an opportunity cost to the investor for bad behavior or bad timing when switching investments. 

A recent report published by the Wall Street Journal (via Morningstar) sited a huge improvement in the penalty for bad behavior indicating that it decreased to only 0.26% over the past 10 years. Congratulations investors! Prior studies place the figure closer to 1.3%;  it was an appalling 2.5% when including the entire 2008 meltdown. The report suggested that the lack of volatility and major market corrections over the past 10 years largely explains that investors have been more patient with their holdings and less likely to change investments and chase higher returns. Extreme volatility can trigger emotional responses that usually end badly. Unfortunately, the article predicts that investors bad behavior will return with the next correction and the penalty will return to the 1.3% mean loss. Your financial advisors job is to eliminate this penalty by pushing back when your emotions say buy or sell in the heat of the next upheaval!