Some of the more common things that people are passionate about are family, work, their favourite sporting team but very few are actually passionate about investing. There is the occasional person you find who loves the markets, is constantly reading the financial papers and analysing financial ratios, but is this beneficial. Do passionate people make better investors?
There are a lot of emotions involved when you become passionate, both good and bad, and these emotions generally help us become better at something. If we look at sport for example being passionate and emotional can improve our performance, if we win we feel good and we like to repeat the feeling and hence we try to win more. In contrast losing creates that sadness and disappointment which feels terrible, something we may wish to avoid in the future and hence we look for ways to improve be it practise or implement a different strategy in order to avoid that disappointing feeling in the future. Investing however is a whole different ball game.
If we have a positive experience our emotions are high and we tend to want to repeat. In investing terms, we buy more. In contrast a bad experience causes us to do the opposite, if we lose money we want to sell to avoid losing any more money. What this means is we tend to buy high and sell low, the complete opposite of what we should be doing.
DALBAR Inc. a US company completed an annual Quantitative Analysis of Investor Behaviour. Although it is based on US investors the results are staggering.
So in one year the average investor has underperformed the US Market by over 4%, however the long term statistics are even worse.
Over 30 years, while the market has increased by just over 10% per year yet the average investor’s performance has been just below 4%. In dollar terms on an initial investment of $100,000, the average investor has missed out on $1.5 million dollars.
While it’s well and good to state that in order to be a successful investor we need to remove emotions and not be so passionate it is easier said than done. Markets will continue to go up and down and it’s how we react to those situations will determine how successful we are at investing. Having an adviser by your side to help navigate you through different market conditions will prevent you from acting out of impulse decisions and increase your overall returns.
Here at JBS our team is accredited to provide holistic investment advice including direct shares, so feel free to contact us to look at your investment strategy.
– Liam Rutty –