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Emotion’s can wreak havoc for an investor

As an asset management firm, we need to rely on economics and our experience to not let our emotions get in the way of sound investing.

As Benjamin Graham, Father of Value investing once said   “Avoid Self-Destructive Investor Behavior. Individuals who cannot master their emotions are ill-suited to profit from the investment process”

Over the 20 years of being in the asset management business, I have seen how emotions can wreak havoc on an investor’s ability to build long-term wealth. That is why I recommend potential clients and non professional investors to engage a professional asset management firm that they can trust to do their investing.

I would like to bring up an illustration in a study done by quantitative analysis of Investor Behavior by Dalbar, Inc and Lipper. In this study over the period from 1988-2007, the average stock fund returned 11.6% annually, while the average stock fund investor earned only 4.5%.

Why did investors sacrifice nearly two-thirds of their potential return? Driven by emotions like fear and greed, they engaged in such negative behaviors as chasing the hot manager or asset class, avoiding areas of the market that were out of favor, attempting to time the market, or otherwise abandoning their investment plan. In our asset management service we understand that successful investing and building long-term wealth requires the ability to control one’s emotions and avoid self-destructive investor behavior.

With our asset management service, we do not try to time the market by going in and out of cash. We look at our client’s long-term and short term objectives and risk tolerance to allocate their assets accordingly. Down markets are inevitable and it is not a time to panic or sell everything which will lock in a loss. As painful as this may seem in the short term, remember all bear markets come to an end. A large part in asset management is to manage risk.  In the very short term, risk cannot be entirely eliminated; however for a one hundred percent bond portfolio, three years is a good time frame for positive returns.

Asset Management in Today’s Investment World

The investment environment of today is even more  dynamic, complicated and fast paced than ever before. World events can rapidly alter the values of specific assets and as an investor,  you need to be ready and informed.  The amount of information available to investors is staggering and grows continually.

When considering investing your hard earned money it is important to hire an asset management firm that has the experience, knowledge and positive results.  There are so many assets from which to choose from and there are many factors to consider when constructing a portfolio.  In asset management, it is important to consider the goals of the client, the risks involved, the taxes that will be imposed on any gain, and a knowledge of the available opportunities and alternative investments.

The investor’s goals should largely determine the construction and management of the portfolio. Investing must have a purpose, for without a goal, asset management does not have a purpose for the client. Some objective must guide the composition of the portfolio.

There are many reasons for saving and accumulating assets through asset management. Individuals may accumulate funds for a down payment on a house, finance a child’s education, start a business using small business loans for this, meet financial emergencies, finance retirement, leave a sizable estate or even accumulate for the sake of accumulating.  For whatever the reasons or motives, saving money with a purpose in mind should dictate the asset management process and effect the composition of the portfolio.  Not all assets are appropriate to meet the investor’s financial goals. For example, savings that are held to meet emergencies, such as unemployment or illness, should not be invested in assets whose return and safety of principal are uncertain. Instead, emphasis should be placed on safety of principal and assets that may be readily converted into cash, such as in money market mutual funds. In the asset management process the funds should not sit idle, but should be invested in relatively safe assets that offer a modest return.

Depending on the short term and long term financial goals, the willingness to bear risk and tax consequences a prudent asset management firm will construct a prudent portfolio to meet their client’s goals.