Investor discipline
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This brief slideshow discusses some elements necessary to recognize that our emotions and reactions to investing and markets often hurt results. Discipline and a focus on what you can control are important to success. There is an investing approach that is based on discipline and evidence from research in both the finance and behavioral finance sciences. Scheduled to post to Better Financial Education blog 11 Jan 2017 http://wp.me/p2Oizj-vH
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Investor discipline
- 1. Investor Discipline I. Humans Are Not Wired for Disciplined Investing II. Many Investors Follow Their Emotions III. Reacting Can Hurt Performance IV. Markets Have Rewarded Discipline V. Focus on What You Can Control 1
- 2. Humans Are Not Wired for Disciplined Investing 2 When people follow their natural instincts, they tend to apply faulty reasoning to investing.
- 3. Many Investors Follow Their Emotions 3 People may struggle to separate their emotions from their investment decisions. Following a reactive cycle of excessive optimism and fear may lead to poor decisions at the worst times.
- 4. Reacting Can Hurt Performance 4 Performance of the S&P 500 Index, 1970-2015 In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Performance data for January 1970–August 2008 provided by CRSP; performance data for September 2008–December 2015 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. Bonds, T-bills, and inflation data provided by Morningstar. Missing only a few days of strong returns can drastically impact overall performance. Total Period Missed 1 Best Day Missed 5 Best Single Days Missed 15 Best Single Days Missed 25 Best Single Days One- Month US T-Bills Annualized Compound Return 10.27% 10.01% 9.24% 7.95% 6.87% 4.94% $89,678 $80,370 $58,214 $33,710 $21,224 $9,195 Growthof$1,000
- 5. Markets Have Rewarded Discipline 5 Growth of a dollar—MSCI World Index (net dividends), 1970–2015 In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved. $0 $1 $10 $100 $43 US home prices hit bottom Fiscal cliff worries Euro zone debt crisis S&P 500 down 46% Subprime mortgage crisis Hurricanes Katrina and Rita Iraq war begins Dotcom stock crash 9/11 terrorist attack Y2K Scare Russian financial crisis Asian currency crisis Income tax rates rate Iraq invades Kuwait Savings and loan crisis Dow drops 23% on Black Monday US inflation at 13.5% BusinessWeek: “The Death of Equities” Gold hits record high S&P 500 down 43% Oil prices quadruple Arab oil embargo 1970 1980 1990 2000 2010 2013 1 A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets. $0 $1 $10 $100 $45 US home prices hit bottom Fiscal cliff worries Eurozone debt crisis S&P 500 down 46% Subprime mortgage crisis Hurricanes Katrina and Rita Iraq war begins Dotcom stock crash 9/11 terrorist attacks Y2K Scare Russian financial crisis Asian currency crisis Income tax rates rise Iraq invades Kuwait Savings and loan crisis Dow drops 23% on Black Monday US inflation at 13.5% BusinessWeek: “The Death of Equities” Gold hits record high S&P 500 down 43% Oil prices quadruple Arab oil embargo 1970 1980 1990 2000 2010 2015
- 6. Focus on What You Can Control 6 Diversification neither ensures a profit nor guarantees against loss in a declining market. Reviewed by Larry R Frank Sr., MBA, CFP® , Better Financial Education 25 Aug 2016 Based on Dimensional’s Investment Principles PowerPoint deck 2016. No one can reliably forecast the market’s direction or predict which stock or investment manager will outperform. A financial advisor can help you create a plan and focus on actions that add value. Creating an investment plan to fit your needs and risk tolerance Structuring a portfolio around dimensions of returns Diversifying broadly Reducing expenses and turnover Minimizing taxes