ETF Investor Psychology
To be successful at anything, requires discipline. In athletics, you must train your body to make certain movements at certain times so that during competition, those movements become second nature and you can perform them without thinking. To be healthy, one must be disciplined to eat right and get proper exercise. And to be successful, or to reach your financial goals, one must have a sound plan and the discipline to follow that plan.
So what exactly does this mean for the ETF investor? Dave Nadig of ETF.com discusses this in a recent column he titled “How Investors Win By Being Just Average.” Dave correctly identifies that to be an index investor, you are fighting against your natural human instinct to get “above average” results. This can be a challenging exercise, especially with the daily “winners and losers” reports in the financial media. Research has shown that too many investors get sidetracked by giving in to either fear or greed and jumping in and out of the market leads to subpar results For example, in the past 30 years, the average investor in all U.S. stock funds earned 7.4% less than the S&P 500 index, according to Dalbar, a financial research firm in Boston. Lagging fund performance and fees and expenses comprise a portion of this, but investor behavior does account for the bulk of the shortfall.
Basically, the fear-greed complex traps way too many investors. Dave’s article breaks it down into a very simplistic concept If your results have been poor because you’re constantly fighting the fear-greed battle, you can improve your own returns, by indexing and maintaining a steady discipline. How? “If you get average market returns, you’re getting better than average investor returns.”
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