Investors Get It Wrong — Again

Warren Buffett with Fisher College of Business...
Image by Aaron Friedman via Flickr
Time and time again investors listen to the financial media and make changes based on fear and greed. Remember the financial institutions make mon ey when you move your money. They don’t really care whether you make money or not.

The latest example of investors behaving badly comes from Morningstar. Once again, the past few years saw investors going the wrong way, moving assets from equity funds into bond funds, causing them to miss out on one of the greatest bull marketsever. The following data presents the behavioral gap for the one- and three-year periods ending December 2010:

  • Domestic equity funds — 2.0 percent and 1.3 percent per year, respectively
  • International equity funds — 0.6 percent and 0.8 percent per year, respectively
  • Taxable bond funds — 1.4 percent and 0.5 percent per year, respectively
  • Municipal bond funds — 1.1 percent and 1.5 percent per year, respectively

Investor activity cost tens of billions a year. The only category where the gap was relatively minor was for balanced funds. For both one-year and three-year periods, the gaps were 0.1 percent per year. Perhaps this is an advantage of balanced funds — investors in these funds tend to pay less attention, which the evidence demonstrates is a good thing.

The evidence demonstrates very clearly that investors would benefit greatly from learning from Warren Buffett, who stated in Berkshire Hathaway’s 1991 annual report: “We continue to make more money when snoring than when active.” In other words, at least when it comes to investing, inactivity is usually the better strategy. Remember this the next time you’re tempted to alter your asset allocation in reaction to the market’s latest move.

This is evidence that investors need an adviser’s help to reach their goals. It is not about picking the right mutual fund, annuity or other financial product but rather developing and following a disciplined strategy.

Please comment or call to discuss how this affects you.

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