“The dominant determinant of long-term, real-life investment returns is the behaviour of the investor himself. Note the choice of the adjective dominant, because it is not casual, but critical. I did not suggest, for example, that behaviour is the predominant determinant, since that would merely have meant that it is more important that any single determinant. I said—and now say again—that behaviour is dominant: It is more important than all the other determinants put together.”
—Nick Murray, 2008
Wow! That’s a pretty bold statement!
After many years in the investment business, I have to say that I agree with Nick Murray.
We do live in a timing and selection culture, even though research repeatedly shows that unpredictable events and other variables mean that no one can forecast markets for an extended period of time.
When I refer to timing, I mean the decisions about when to be in and out of the markets, when to move among different market sectors.
When I talk about selection, I refer to the decisions about which stocks, funds or managers will outperform.
I can truly say I have never met anyone who disagrees with me that we should buy low and sell high—at least until we are at the ‘lows’ or at the ‘highs.’
Then, because an investor can panic and get emotional, they want to do the exact opposite because that would make them feel better.
It’s been my experience that, on average, investors would much rather buy high and chase markets up or sell low and run for cover in down markets.
Research shows that if investors are left to make their own decisions, they make choices that impair their returns, which reduces their ability to fund their long-term investment goals, such as retirement or their children’s education.
A paper written for The Vanguard Group Inc. by Donanld Bennyhoff and Francis Kinniry (December, 2010) noted that returns that investors receive may be very different from those of the funds that they invest in.
For example, on average for the 10 years ended March 31, 2010, fund investors trailed a moderate policy allocation by 65 basis points per year.
This means that the average investor destroyed 0.65 per cent of their return annually for a decade simply by not buying and holding the investment fund allocation.
Investors can also be moved to act by fund advertisements that tout recent, but historical outperformance, as if they somehow inherit those historical returns, despite disclaimers stating that past performance is “no guarantee of future results.”
Historical studies of mutual fund cash flows show that, after protracted periods of relative out performance in one area of the market, sizeable cash flows tend to follow.
That means if the bond markets have been outperforming, then that’s where investors put their money.
My simple message is not to chase the markets because you will be buying those investments at higher prices or selling those markets at lower prices than you should.
You need to buy low and sell high and there are simple, uncomplicated ways of doing that which I will get into in future columns.