What Makes a Successful Investor?
Successful investing is about managing risk, not avoiding it.
Every year since 1994, investment research firm DALBAR publishes an annual study on investor behaviour and the returns that they achieve, comparing them to buy-and-hold benchmarks. The study focuses on the actions that investors take and their results. Sad to say, year after year, investors fail to match, let alone beat such benchmarks.
DALBAR’s QAIB Study (Quantitative Analysis on Investor Behaviour) found that investors underperformed significantly during periods when the market underwent a crisis. The results of 2020 are not in yet, but it is highly likely that the COVID-19-resulting market turmoil caused many to exit in a panic.
The study (QAIB) has a section where they measure fund inflows and outflows in the market. This can determine how often investors correctly predict the direction of the market in the following month. The Guess Right Ratio of investors can be calculated by the frequency that market gain follows a net inflow, or conversely, where market decline follows a net outflow — i.e. the instances where investors were able to invest before the market goes up, and sell before the market goes down. The chart below shows that the predictions made by investors are correct at least half the time for 12 out of the last 20 years. However, in 2019, they were only correct 3 out of the 12 months.
Unfortunately for investors, whether they get it right or not is often inconsequential to attaining superior gains. This is because the dollar volume of bad guesses exceeds the dollar volume of right guesses. Even one month of wrong guesses can wipe out several months of right ones. Recall that Nobel Laureate William Sharpe’s research in 1991 which noted that investors required an accuracy rate of more than 70% to achieve returns higher than a buy-and-hold strategy.
Research shows that successful investors share a few common traits. You may be surprised to hear that intelligence and knowledge of financial markets are not among them. The three traits that successful investors share are as follows:
Having a Clear Goal —
Every successful investing journey starts with a set of clear goals. Goals come in all shapes and sizes. Big goals could sound like retiring with $5M dollars in the bank, with your house fully paid up, and sending your children for an overseas education. Small goals could be setting aside enough money for a 2 week vacation, or 1 year sabbatical from work. With a goal in mind, you can ascertain what type of risk and return is suitable to help you achieve it. If you are uncertain as to what type of portfolios can give you success, speak to a fiduciary adviser like GYC.
Discipline —
A few years ago, Fidelity investments conducted a study to find out which of their investors did the best. The results were surprising. Those who were successful in investing were either dead or forgot that they had investment accounts in the first place. A separate study by Vanguard found that the median length of account ownership of its investors was around 13 years with an average investor making only 11 trades a year. Contrast this with an average account holder at a brokerage.
Gleaning from these studies, we can conclude that investment discipline comprises of two components — One, to commit to a long-term investment journey; investing over a short time frame usually provides a poor experience. Two, committing to your investment plan and portfolio, and sticking to it even when the going gets tough, like it did in 2020. Those who stuck to their guns, rebalanced and added assets when markets turned turbulent were rewarded handsomely.
Striking a Balance —
While we do invest to generate a return, and to make your hard-earned money work for you, it would serve no purpose to fill your portfolio to the brim with investments that make the dubious promise of providing double digit returns. On the opposing end of the spectrum, it would also do you no good to keep all your money in fixed deposits in the bank. Choosing an optimal asset mix, with allocations to stocks, bonds, and cash in appropriate percentages will give you the returns you desire, while also providing a good buffer when markets get volatile. Your asset allocation also determines the returns that you are able to receive as an investor. If you are unsure of what type of asset allocation or portfolio you require, speak to your financial advisor, or schedule an appointment with us.
You don’t need a deep understanding of finance and how markets work to be a successful investor. Having a clear goal, discipline, and being balanced, together with an advisor guiding you along, will put you on the path to success.
