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What are the Contributors to Client Performance? The Length of Time you Remain Invested

2.  The length of time you remain invested

In one of our recent posts, we discussed the importance of asset allocation as a key determinant for the long term performance of your investment portfolio.

The second in our series on these ‘contributors to performance’ focuses the length of time you remain invested.

History has proven that the longer you stay invested, the better you’ll end up doing as an investor.But that’s easier said than done.Intense market fluctuations combined with a steady flow of bad news from the media can make it really hard to stay on plan.

Today we’ll take a look at this important aspect of successful investing by showing you:

  1. proof that the longer you stay invested, the more success you’ll have as an investor,
  2. that investors traditionally underperform the markets they invest in due to mistakes in their behaviour, and
  3. the importance of having an advisor who works with you to ensure that you don’t make the same mistakes that the average investor makes.

In 1994, Dalbar Inc. out of the US created a study called the Quantitative Analysis of Investor Behaviour.  The goal of the study was to “measure the effects of investor decisions to buy, sell, and switch into and out of mutual funds over short and long term time frames.”[1] 

Their 2016 study came up with the following numbers:


Investor   Returns[2]InflationS&P   500Barclays   Aggregate Bond Index

Equity   FundsAsset   Allocation FundsFixed   Income Funds
30 Year3.661.650.592.6010.356.73
20 year4.672.110.512.208.195.34
10 Year4.231.890.391.887.314.51
5 Year6.923.280.101.5812.573.25
3 Year8.853.81-1.761.0715.131.44
12 Months-2.28-3.48-3.110.951.380.55

When you look at the columns for the S&P 500 and the Barclays Aggregate Bond Index, it is evident that had you remained invested over the last 3, 5, 10, 20, and 30 years, you would have done very well.  This is quite impressive considering anything over 10 years had to go through the 2008 credit crunch, anything over 20 years had to go through the tech wreck of the early 2000s, and the 30 year number had to go through the stock market crash of 1987.

Unfortunately, the average investor didn’t fare nearly as well over these periods and the reason is because they don’t tend to hold onto their investment strategy for the long term.Dalbar showed in 2015 that people tend to hold their Equity Funds for about 4 years, their Bond Funds for about 3 years, and their Asset Allocation Funds for a little under 5 years.[3]  When they attempted to understand the difference between investor performance and index performance, they looked at the 20 year number and determined that close to 75% of the difference can be attributed to things like panic selling, excessively exuberant buying, attempts at market timing, and planned or unplanned cash management needs.[4] 

This is an area where we feel we play a crucial role.  At LGK Wealth Management, we know that there will be times when one or two of the funds that we’ve recommended will be underperforming and you’ll want to replace them for something that’s doing better.  There will be times, perhaps like 2008, when the market is in the middle of a bear market and you’ll wish to cash out your investments.  But at LGK, we care deeply about your wealth and your success.  We always consider the results of the Dalbar study and the behavioural challenges that investors face.   And we will provide ongoing counsel to ensure that the portfolio and plan that we’ve designed with you ensures your long term financial success and prosperity. 

In conclusion, The Dalbar study shows us the benefits of staying invested for the long term while at the same time demonstrating that investors typically miss out on those returns due to poor choices.  When you utilize the services of LGK Wealth Management, you get a team that will strive to keep you invested in your long term financial strategy at all times.  On a final note, that doesn’t mean that we don’t want to protect your portfolio from large market drops (a topic for an upcoming blog); however, it does mean that we want to protect your portfolio from every investor’s worst enemy – fear and greed.

[1] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior for the period ended 12/31/2015, p 3

[2] Returns are for the period ending December 31, 2015. Average equity investor, average bond investor and average asset allocation investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions and exchanges for each period.

[3] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior for the period ended 12/31/2015, p 5

[4] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior for the period ended 12/31/2015, p 10

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