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www.insideHALTON.com | OAKVILLE BEAVER | Thursday, July 14, 2016 | 32 I Individuals are lousy investors because of human behaviour Dollars & Sense Guest Contributor ndividual investor's track record is often poor or very poor. This fact is not new, and now we have additional information con rming that the long history of underperformance continues. Dalbar is an independent U.S. company that provides nancial services industry research, and publishes a report titled Quantitative Analysis of Investor Behavior. The goal of the report is to evaluate the performance of individual investors against the underlying markets they invest in. In June, Dalbar released its 22nd annual report based on U.S. investors investing in U.S. stocks for the period ending December 31, 2015. Last year, the U.S. stock market, as measured by the S&P 500 Index, had an annual return of 1.38 per cent. Investor returns suffered a loss of 2.28 per cent. Over the past three years, the S&P 500 had an annual return of 15.13 per cent compared to individual investors only achieving a three-year annualized return of 8.85 per cent. In both cases, individual investors had investment returns signi cantly less than the market they invested. Speci cally, they underperformed the market by 3.66 per cent last year and 6.28 per cent for each of the last three years. Most of the cause for this underperfor- Peter Watson mance is the responsibility of the investor. Investors do face certain headwinds when investing in the markets. You are not able to invest in the S&P 500 directly, so whichever investment vehicle you choose will have an associated cost. Plus, there are ongoing costs of transactions that must be accounted for. Regardless of the cost of owning investments, having investment underperformance by such signi cant amounts can only mean that individual investors do an extremely poor job at investing. The single most important factor causing underperformance is human behaviour. Stated another way, and respectfully, we are the problem. Regrettably, humans are lousy investors. We react impulsively as a result of shortterm news, and continue to adjust a longterm investment strategy as a result of shortterm noise. Regardless of the cost of owning investments, having investment underperformance by such signi cant amounts can only mean that individual investors do an extremely poor job at investing. The single most important factor causing underperformance is human behaviour. Stated another way, and respectfully, we are the problem. Peter Watson Guest Contributor When markets react negatively to shortterm news, investors should accept this willingly because that is how markets are supposed to react. Investing in the stock market is an excellent long-term asset class but it needs time to deliver excellent long-term returns. Normal stock market volatility results in short-term returns that re ect normal volatility. It is bene cial to look at stock market returns over much longer periods than the one-year and three-year time provided above. In rounded numbers the average annual return from the S&P 500 over the last 30 years is 10 per cent and individual investors underperformed annually in the amount of seven per cent. The 20-year average annual return from the S&P was eight per cent and individual investors underperformed by four per cent annually. My recommendation is to use the Dalbar research to your advantage. That starts with the realization you are probably not a very good investor. I encourage you to realize the normal mistakes most of us make when investing, and develop an investment strategy that will help you overcome the underperformance individual investors face. If, as a result of this exercise, you can improve your investment returns by two or three per cent annually, then you can feel the accomplishment of proactively managing your investments. Individual investors have a history of getting lousy returns. Hopefully, you can be one of the lucky ones and buck this pattern. -- Submitted by Peter Watson of Peter Watson Investments and Aligned Capital Partners Inc., MBA, CFP , R.F .P ., CIM, FCSI., Certi ed Financial Planner Visit insidehalton.com/oakville-on. `Like' the Oakville Beaver on Facebook. STEAK FEST JULY 7TH - SEPTEMBER 5TH 2016 o of off of f Summer Sale Hazy Days of o 7 GREAT FEATURES 6 MENU CLASSICS STARTING FROM ENTER TO WIN A SMOKER/BBQ 19.99 Burlington 4045 Harvester Road 905.633.9929 Mississauga 6531 Mississauga Road 905.820.6300 HOME 1-866-575-8078 qsiwindows.com Ale House Rib Eye Jack's s TWO GREAT LOCATIONS 25 % ** Offer not applicable on basement window, retractable screens, Martin Wood Products, or storm door purchases.