Sound Financial Group Blog

Comparison between the self control attributed in life (note to self to leave the chocolates alone and do more exercise) and the self control and discipline required when investing or more specifically the returns received from investments.

Without wishing to sound like a broken record... that’s if you are old enough to know what a ‘record’ is, then more evidence has emerged recently in respect of investor behaviour and how it contributes to investment returns.

In life, self-control is an attribute that many of us know we need to exercise more of (note to self to leave the chocolates alone and do more exercise). In the world of investing, self-control and discipline have, for a very long time now, been known as major contributing factors in the returns that investors receive. Regular readers of these blogs will be aware of data showing how many investors do not get even close to receiving average returns from their investments.

The latest study by Barclays Wealth, which surveyed over 2,000 wealthy people (who have invested at least £1.5 M each), asked about strategies they employ to overcome personal indiscipline and how they manage self-control. The exact results are too long and detailed to go into in this short blog, but in essence the study found that around 40% of respondents believe that they consistently try to ‘time the markets’ rather than adopting a buy and hold strategy and one third believe that to do well in the investment world you need to ‘buy and sell often’.

We know from many studies of investor behaviour and psychology that investors get caught in a ‘paradox of trading’ whereby they feel that they need to ‘do something’ to improve their returns, be it altering the asset allocation of the investment portfolios and perhaps buying and selling more equities, bonds or whatever. Studies show that the reverse is true and that a by-product of too much ‘action’ is an increase in trading/dealing costs that in itself will eat away at portfolio returns by way of a ‘cost drag’.  

Further evidence from the survey shows that women are less prone to the problem of excessive trading/dealing than men and have better self-control (probably the lack of testosterone) and that age and experience also brings greater self-control.

So it all boils down to having an investment philosophy with a strategic asset allocation based upon an expected/target return, buying and holding the asset class funds as cheaply as possible and then rebalancing at certain intervals, whilst exercising great self-control. Simples!

Now where did I store my LPs, old 45 singles and turntable..?   

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