Tuesday, February 13, 2018

Enhancing Investment Results By Utilizing An Investment Mentor

In a recent article, Strong Hands - Bridging the Behavior Gap, by Pim van Vliet, PhD, a Managing Director at Robeco Institutional Asset Management, it was noted that,
"the average mutual fund investor lags a buy-and-hold strategy by -1.9%. This finding is persistent across different styles, varying from -1.3% for value investors to -3.2% for growth investors. Also 'passive' investors in market funds underperform a buy-and-hold strategy by a whopping -2.7%."

A feature common to the underperformance by investors is ones emotions. Periodically I write about investor sentiment and note how bullish or bearish sentiment at extremes often serves as a contrarian signal. The Rebeco study highlights this fact as well referring to it as the 'behavior gap'.
"Besides performance, timing decisions are often driven by emotions such as envy, fear, or greed. In the end institutional investors are driven by the same emotions as mutual fund investors. Since 'evil' often manifests itself in socially acceptable forms, it will be difficult to detect. Envy is often masked as a search for excellence. Greed often switches roles with hope, while fear can be framed as a 'choice for safety'. Emotions can be helpful in life, but when it comes to investing, they usually are not."

Just as someone advancing in their job can benefit by having a mentor during their career, ones investment success can be enhanced by partnering with someone that can help by keeping one on track with their investment plan. A key to success might be the advisor, or better yet, partner, someone who understands ones near and long term goals. As the Robeco article states, it must be a joint venture:
"Partnering often helps in life to stick to your plans. For example in sports, studies, and work it helps if someone knows your plan and is willing to help you execute it. Many successful investors acknowledge that the biggest enemy is you. The best way to win this internal battle is to create a plan and seek allies in order to successfully execute this plan. We should not underestimate how easy it is to cheat on good intentions."
Investors aligning with a good advisor partner or ally might find they achieve better investment results by doing so.

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