Why Investors/Advisors Underperform. Good Time to Check!

 

Dalbar Report. Psychological factors are the main contribution to poor returns.

Bad Math. Bad Investment Advice.

Steve Keen explains bad economic policy in yesterday’s interview

Why not add in the most extreme and unstable world market conditions?

Yellen’s favorite labor market indicator hits 7 year low

What investment behavior are you anchored to? Check your Portfolio Theory.

Cycle theory holds up better. Adaptive allocation is designed for dynamic changes.

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0616Dalbar-2016-Psychology-060616

 

 

 

 

 

 

 

 

 

 

 

 

Dalbar Report. Psychological factors are the main contribution to poor returns.

Each year Dalbar produce an investment performance analysis to see what returns investors are getting and why they perennially underperform. The main takeaway is that psychological factors play the biggest role in leading to poor performance.

Many factors are involved but ….

“The biggest of these problems for individuals is the “herding effect” and “loss aversion”.

These two behaviors tend to function together compounding the issues of investor mistakes over time. As markets are rising, individuals are lead to believe that the current price trend will continue to last for an indefinite period. The longer the rising trend last, the more ingrained the belief becomes until the last of “holdouts” finally “buys in” as the financial markets evolve into a “euphoric state.”

As the markets decline, there is a slow realization that “this decline” is something more than a “buy the dip” opportunity.  As losses mount, the anxiety of loss begins to mount until individuals seek to “avert further loss”by selling.

As shown in the chart below, this behavioral trend runs counter-intuitive to the “buy low/sell high” investment rule.

Investor-Psychology-060616

“In the end, we are just human. Despite the best of our intentions, it is nearly impossible for an individual to be devoid of the emotional biases that inevitably lead to poor investment decision-making over time. This is why all great investors have strict investment disciplines that they follow to reduce the impact of human emotions.

More importantly, despite studies that show that “buy and hold,” and“passive indexing” strategies, do indeed work over very long periods of time;the reality is that few will ever survive the downturns in order to see the benefits.

The data also shows that when investors react, they generally make the wrong decision.”

However, there is another major factor to poor returns

Bad Math. Bad Investment Advice.

Never assume the “experts” know what they are doing. This is particularly the case when many poorly conceived notions have a way of becoming “standard” methodologies, and even become a qualifying requirement for advisors.

“The point is that the CAPM model, for example, is still alive and well and being taught to brand new generations of fund managers, and CFA candidates, despite the fact that it is garbage.

Financial Bad economics. Overly crude modelling. Widespread adoption within the financial services industry. What could possibly go wrong?”

 

Bad Investment Math, Bad Advice.

Steve Keen explains bad economic policy in yesterday’s interview

Armed with these fatal flaws in investment behavior and advice what could go wrong?

Why not add in the most extreme and unstable world market conditions?

http://www.zerohedge.com/news/2016-06-08/global-stocks-most-expensive-6-years-bond-yields-hit-record-lows

Yellen’s favorite labor market indicator hits 7 year low

 

 

What investment behavior are you anchored to? Check your Portfolio Theory.

When major trends change a static allocation is unlikely to work well, particularly if the model used claims the future can be calculated based on the past. In reality this is a kind of very lagged trend following system, but without even a trend execution strategy!

This is very unlikely to be helpful and could be disastrous.

Investors should check whether this is the basic assumption on which their portfolio allocation is built. How well did that work in 2000 through 2003? How well did that work in 2007 through 2009?

Cycle theory holds up better. Adaptive allocation is designed for dynamic changes.

.http://chrisbelchamber.com/cycle-dynamics/

http://chrisbelchamber.com/track-record/

 

 

 

 

 

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