Saturday, December 24, 2011

Investment Behavior and Returns


Why investors are not making returns in the stock market?

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

But how many investors have REALLY got these kinds of returns…?

In this context knowing about the study conducted by Dalbar to determine how the investment behavior and decisions impacted the overall investment performance would be advisable. Dalbar, Inc. is a US based leading financial services market research firm. They have done comparative study on the returns of S&P 500 Index and the returns of the investors for a 20 year period ending 31-12-10.
The study revealed the following two important facts.
·        The average return of the S&P 500 during this 20 year period is 9.14%.
·        The average return of the equity investor during the same period is only 3.27%

When the market is delivering so much, why is that the investor is making out less? What are all the factors contributing for this gap in the market returns and the investor returns?
Though the market is delivering returns, investors were not able to benefit. Why is it so? What went wrong?  It is because of the nature or character of the investor.
Agriculture is getting affected by nature, either because of excess rain or no rain.  But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.
Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.


What are the natures or behaviours of an investor that blocks him from getting the market return?
Fear:
When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. At that point in time everyone will come with their own logic, reasoning, and statistical evidence on the chances of further losses. Fear stands for “False Evidence Appearing Real”.

Greed:

Most of us have a desire to acquire as much wealth as possible in the shortest amount of time.  This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.

An investment portfolio based on ones personality

Basing investment portfolios on one’s personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

Follow the flock policy

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. The pitfalls of group behavior lead us to buying high and selling less.

It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.


A look at positive investment behavior:

It is good to be investment smart with humility and reasonable aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behavior requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.)

2 comments:

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Basing advance portfolios on one’s claimed brand and dislikes are the aboriginal of the able influences. It is like advance in cars and adorned accessories aloof because you adulation them. Advance on shares aloof because you anticipate they are acute or blatant is ambiguous, for they could bore in the continued run. It is more good instead to advance in assisting ventures that pay in the continued run. It is true; our advance fancies accomplish us pay a abundant price.

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