Is it really different this time? Fueled by fear or greed, investors have the bad habit of turning their backs on fundamental investment truths when emotions run high. I recently came across an article Seven Truths Investors Simply Cannot Accept detailed seven so called truths. I’m paraphrasing:
- No one can outperform all the time. There is no manager, strategy, hedge fund, mutual fund or method that always works. If there were a constantly winning strategy, we all would be managing out portfolios from our own private island.
- Past performance does not guarantee future performance. This disclaimer can be found in all fund prospectuses! Simply, there is no correlation between managers’ past or recent performance and what may happen in the future. Regardless, investors still buy the latest hot performing investment.
- Taxes and commissions matter. It’s not what you make, but what you keep. Taxes and fees are even more important to consider in a low return environment.
- Intelligence doesn’t guarantee high returns. As smart as your fund managers are, nobody has a crystal ball to predict market movements.
- Incentives matter. Everyone has to earn a living. The car salesman has to earn a commission and that impacts his negotiations. Similarly, the compensation package of your fund managers may influence their investment decisions and affect you.
- The crowd’s usually wrong at the worst possible time. Historically, individual investors earn less than the market because their performance is often hurt by frequent trading.
- Fear trumps greed. Behavioral science has proven that we feel more anguish over losses than we feel joy over gains. That’s why markets drop much more quickly than they rise.
Keeping these time-tested truths in mind can help you harness your emotions and become a better investor.