Why Average Investors Earn Below Average Market Returns

Investor Overreactions Cause Poor Historical Returns By Dana Anspach, About.com Guide

Dalbar Inc. is a company which studies investor behavior and analyzes investor market returns. The results of their research consistently show that the average investor earns below average returns.

For the twenty years ending 12/31/2008 the S&P 500 Index averaged 8.35% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 1.87%.

Why is this?

Investor Behavior Causes Poor Market Returns
Study after study shows when the stock market goes up, people pour money into equity mutual funds, and when the market goes down, they pull money out. During bear markets, they pull even more money out. They continuously buy high and sell low. They chase trends, focused on what is happening right now.

This irrational behavior causes their market returns to be substantially less than historical stock market returns.

What would cause investors to exhibit such poor judgment? After all, at an 8% return, their money would double every nine years. Rather than chasing performance, an investor could simply have bought a single index fund, and earned significantly higher returns.

The problem is the human reaction, to good news or to bad news, is to overreact. This emotional reaction causes illogical investment decisions. This tendency to overreact can become even greater during times of personal uncertainty; near retirement, for example.


4 Truths To Follow To Increase Your Market Returns

When it comes to your investments, if you feel your emotions are getting the best of you, come back to the following truths:
1. Do nothing. A conscious and thoughtful decision to do nothing is still a form of action.

2. Your money is like soap. To quote Gene Fama Jr., a famed economist, “Your money is like soap. The more you handle it, the less you’ll have.”

3. Never sell equities in a down market. If your funds are allocated correctly, you should never have a need to sell equities during a down market cycle. This holds true even if you are taking income. Just as you wouldn’t run out and put a for sale sign on your home when the housing market turns south, don’t be rash to sell equities when the stock market goes through a bear cycle. Wait it out.

4. Science works. It’s been academically proven that a disciplined approach to investing delivers higher market returns. Yeah, it’s boring; but it works.

Start following these truths now and become one of the few investors earning above average market returns.


(Source: http://moneyover55.about.com/od/howtoinvest/a/averageinvestor.htm?p=1)

The POWER of Regular Savings

Hello everyone! ^^ I am here to share the Power of Regular Savings.

Please ask yourself, “Do you have a proper and clear financial plan? Can you retire? Can you afford the living costs & expenses of 22 years after you retiring (Assume your life expectancy is 77 years old, and you are “retire” on 55 years old according to Malaysian Employment Law)?”

Let’s me show you some facts:
• People are living longer- Life expectancy for woman is 83, and man is 77
• They are marrying and having children later- At retirement age, the children are still in school or university
• 70% of retirees use up all their EPF money within 3 years after retiring
• Inflation rate is 4% in urban areas
• 3 meals a day at RM20 now may cost RM64 in 20 years
• Average price of food stuff has increased by 20.81%
• Medical inflation is 15% each year
• Most Malaysians do not have Financial Security

The principles of SAVING
It’s not How Much, but Where & How you save is important

so HOW?
•Put in (save) money regularly at a fixed period of time with a fixed amount
•Applying Ringgit Cost Averaging (RCA) to take advantages of market volatility
•Medium to Long Term

WHY?
Buy more units when prices are low. Fewer units when prices are high. Ultimately, you will achieve a lower average cost which translates into a higher return when the market recovers.

While there can be no assurance that any investment strategy will prevent losses, RCA will mitigate the risk
of making a single large investment at a time when the market is near its high.

WHERE?
Public Mutual Berhad (“PMB”)
• The largest private unit trust company in Malaysia
• Manage more than 70 funds with total Net Asset Value (NAV) of more than RM35.9 billion
• Market Leader with market share of 40.7%
• More than 2,320,000 account holders
• Wholly-owned subsidiary of Public Bank

WHO can help you?
I am the Unit Trust Consultant of PMB and you are welcome to contact me via my email:
chaishuan@hotmail.com, or msn: cozzmint@hotmail.com if you want to know more about this.

So, Let’s Create Early Accumulate Regularly and enjoy the Power of Regular Savings if you wish for a better future!

I wish everyone a very Happy Investing =)
(Reference: Sunday Star and July 2010 Bulletin)

Rule of 72

I learned an interesting & easy rule, the Rule of 72, to get the estimation of how long an investment will double with a given rate of return, or with a target timeline, find out how much rate of return need to obtain.

A simple example:
Cymbeline bought a house for RM200K, and in 8 years time, the house's value increase to RM400K, what is the inflation rate?
Simple Answer: 72/8years= 9%

Christabel has RM60K, she wants to know when she can double her investment with the interest of 10%.
Simple Answer: 72/10= 7.2years

Interesting right? haha ^^v