Why Most Investors Perform Far Worse Than the Stock Market
Throughout life, there is often a big distance between what we know we should do and what we actually do. Take dieting, for instance. Nearly all of us have fallen prey time and again to overindulging in savory snacks or sweet desserts, even when we’re well aware it disrupts our efforts to get healthier.
In the world of investing, this phenomenon has been dubbed the “Behavior Gap.” By and large, investors have made significantly smaller returns than the actual markets they’re invested in due to self-sabotaging behavior. Dalbar, a financial research firm, found that over the last three decades, the average investor performed around seven percent worse than the S&P 500 (a major benchmark for the US stock market).
Much of this dangerous gap in investing returns stems from our emotions. We often attribute our emotions to successful choices; after all, how often have you heard the phrase, “follow your gut?” However, when it comes to investing for the long term to reach your goals, your feelings often prove counterintuitive. Some of your strongest emotions – fear and greed – can tempt you to sell when your investments are low, and buy when your investments are high.
Take Brexit, for example. When the news of Britain’s eventual departure from the European Union broke, the stock market initially responded rather poorly. Following your fearful emotions would lead you to sell your investments at a low, and ultimately become sorely disappointed when the stock market reached all-time record highs shortly thereafter.
As Warren Buffett once wisely said, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” Prudent investors know that their emotions can be their worst enemy in investing. Follow your feelings and follow the crowd, and typically you’ll be led to perform the opposite of successful investing behavior.
At LexION Alpha, we avoid emotional speculation and maintain a grounded look at long-term results. Our disciplined, rational investment approach is strictly based on the math and science of the markets. As our client, you’ll be invested in a well-diversified portfolio that will always focus on successfully growing your wealth and achieving your goals and needs.