It takes more than learning from text books to make money. The difficulty is to grasp emotions and be able to counter natural tendency to buy high sell low. I am a sufferer of sorts thus i do bring up as much of these articles as possible to learn from them.
Servo Wealth Management have a narrative of a very well performing actively managed fund in 2013 which for the next year performed not as well
- The good performance attracted more investors to invest in it in 2014, which it goes on to underperform. This gives an idea how difficult the environment for active managers are
- Portfolio rebalancing should mean that investors rebalance by channelling more of their bonds or cash allocations to the fund. Sadly the investors pulled a huge amount out of it
- The funds 5 year annualized return was 25% per annum which greatly out performs the SP500 and Russell 2000, but Morningstar reported that the investors dollar weighted returns was 15%, or 10% less. This is known as the behaviour gap.
- St Louis Fed did a research on investors over the past decade and determine the behaviour gap to be 2%
- Morningstar published an annual study on investor behaviour and found the past 10 year return gap to be 2.5%
- John Bogle’s research in his book Clash of Cultures states that the gap is around 2%
- First way of reducing such gap is to identify the workings in an Investment Policy Statement
- Second, adopt a minimum cooling off period and add that as an addendum to the Investment Policy Statement. I like this approach in that, if the reasons still sound compelling after 1 year, then at least the decision is less on emotion. This would also let sudden volatility spikes such as 1987, 2009 to 2009 drastic bear markets work itself out
- Third, invest in more broad based lower volatility funds rather than the higher risk and higher returns one. If you know that you are likely to have problems maintaining that discipline in a harsh environment, venture into one that is historically less harsh, so that it gives you more chance not to do stupid things