There was a study conducted in the US based on returns of 500 companies between 1980-2000. The DALBAR study showed that the average return for those companies over that 20-year period was 12 per cent. Guess what the return was for actual investors in those 500 companies over that time … 4 per cent.
Flighty investor buy/sell behaviour was way off and accounted for an 8 per cent difference in return. Investors were fear selling as markets were falling and trying to buy as they perceived markets were rising. No one can time the market. All we can do is understand our market and, more importantly, understand the underlying companies we are invested in.
There are many investment philosophies out there.
One suggests that 50 per cent of your returns are made up your investment behaviour, 45 per cent of your return is to do with asset allocation and the remaining 5 per cent is timing and selection.
The traditional investor would contest this and say the investor return equation is 90 per cent asset allocation and 10 per cent timing and that it has nothing to do with investor behaviour. The DALBAR study reveals a very strong conviction that investor behaviour has a massive impact on your overall return. It also identified that long-term investors only held their stock for an average of 3.2 years. Those investors made bad short-term decisions based upon events that were happening in the world at that time.


Six things to remember:

1 – Share price does not indicate actual company value – it is purely indicative of buy/sell activity in the market;
2 – Volatility is normal – replace fear emotion with patience;
3 – Make sure you have cash reserves for your cashflow requirements – don’t be forced to sell in a down market;
4 – Ensure your investments are diversified and in the right asset allocation suitable to your tolerance to market risk – don’t put all your eggs in one basket;
5 – Understand what you are investing in and get advice from a qualified professional; and
6 – Be wary of media doomsday headlines.


Play it cool out there investors.

Jim Mills is principal of Merit Financial Planning
If you're looking for a financial planner you can trust,
contact Jim on 1300 827 439 or visit website

This article sponsored by Merit Financail Planning
This information is general in nature and does not take into account your objectives, financial situation or needs. You should consider whether this information is suitable to you and your personal circumstances.
Jim Mills is an authorised Representative of Merit Wealth Pty Ltd AFSL409361.'

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