What's The Biggest Threat To Your Investment Portfolio?

behavior Apr 18, 2018

By Puah Soon Lim

 

I was part of a panelist on an investment forum organized by Moneysense and SGX recently whereby we were asked a very profound question, and I thought it makes sense to make this the theme for this week’s blog post.  

The question was: "What do you think is the biggest threat to your portfolio?"

The replies from the other panelist focus mainly on the economy, but when it was my turn to speak,  my reply generated a lot of laughter in the room. 

My answer was“What do you see is the biggest threat to YOUR portfolio?....YOU"

Although it generated waves of laughter in the room, I told the crowd that I am dead serious about what I just said. I explained that most investors think that it is most crucial to keep in touch regularly with the market and stay ahead of the curve to perform well. It is often assumed that knowing what is happening right now is the single most important thing that an investor must do to boost a portfolio's performance.  For me, all of those things represent just noise. The single biggest threat that your portfolio faces is you, yourself.

It is a tough pill for many of you to swallow but it must be done for without understanding this at first, you are doomed to repeat the mistakes of many. Let me repeat the sentence above: The biggest threat to your portfolio is you.  Most people have a hard time accepting this. How could that possibly be the case? Before you dismiss this completely. Let's look at the evidence and then reflect on your personal experience.

Every year, a Boston research firm named DALBAR release a report titled: "Quantitative Analysis of Investor Behavior."  Should you be concerned about this report? I think you should.  In fact, if you want to get better at investing you should pay attention. The title of the report sounds like a typical academic paper, but it is easier to interpret the findings than you expect.

For more than 30 years, DALBAR has been collecting data on investors' cumulative decisions about when to buy, sell and switch unit trust(mutual funds as are called in the US). The firm has been issuing annual version of this report since 1994.  What is notable is that every year the conclusion is almost the same: On average, investors earn less than unit trust performance figures imply. In some cases, they earn a whole lot less.  DALBAR has concluded that the fault doesn't lie with the fund manager, the fault lies with the individual investors. Also, it could also be the fault of the advisers who advise the client on buy, sell and switching decisions.

The last report covers over 30 calendar years from 1984 to 2016. The period under study includes the black Monday clash of 1987, numerous bear and bull market as well as the famous 2008 financial crisis.  Just one simple lesson from this study: It doesn't matter if bull or bear is in charge, "Investor results are more dependent on investor behavior than on fund performance."  

Knowing all these, what can you do to not repeat the mistake that others are making?

In the book The Intelligent Investors, Benjamin Graham offers a solution in the form of a Mr. Market. While many investors see Mr. Market as a nasty and harsh enemy, few truly understand who the enemy actually is. Many novice investors falsely believe that the secret to generating a consistent return is winning the battle against Mr. Market or there is a secret recipe somewhere that if applied correctly would enhance the performance of their portfolio.

To be consistently profitable, you must overcome Mr. Market's drive to throw you off your game plan. Mr. Market challenges every fiber of an investor's intellectual, emotional, psychological, physical, and spiritual being. In the end, though, it is not an investor's battle with the market that determines the outcome. It is one's battle to overcome those human character traits that interfere with consistent patience and discipline.

Knowing yourself, your weakness and strengths, as well as continue to work on improving those, is something you won't be able to avoid if you desire long-term success. No strategy, no matter how perfect and well-crafted, will succeed long-term if you don't also figure out a way to not only control yourself, harness all of your strengths while minimizing all of your weakness concerning all things, both toward the market and well-beyond. Understanding thyself is truly a very important first step.

Now, after reading my answer to the first question, you may want to reflect on this next one - "What can you do to avoid the biggest threat to your portfolio?" and share your reflections and commets with us.

 

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