Investing and Emotions: How the Average Investor Stacks Up

A study by Dalbar underscores the importance of controlling emotions and avoiding self-destructive investor behavior. From 1995–2014, the average stock fund returned 9.9% annually while the average investor earned only 2.5%. We call the gap between these results the “investor behavior penalty.”

Why have investors historically sacrificed more than half their potential return? Driven by emotions like fear and greed, they succumbed to negative behavior such as:

• Pouring money into the latest top-performing manager or asset class, expecting the winning streak to continue

• Avoiding areas of the market that have performed poorly, assuming recovery will never occur

• Abandoning their investment plan by attempting to successfully time moves in and out of the market, a near impossible feat

Successful investors throughout history have understood that building long-term wealth requires the ability to control emotions and avoid self-destructive investor behavior. Avoid overreacting to market downturns. Opportunity is often greatest when you feel the most defeated. Staying invested through difficult times and periods of uneven growth provides you with the greatest opportunity for growth. Studies have shown that missing just a few top-performing days can hurt your overall portfolio returns as seen in the Dalbar chart.

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