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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.