Why Investments Outperform Investors

I would like to think of myself as a boating enthusiast. Yet, if it were a crime to be a "boating enthusiast," the evidence to convict me would be weak and circumstantial at best. Boating enthusiasts are out on their vessels regularly. I, on the other hand, find reasons (read: excuses) to not go out on a particular day. For example, it may be too windy or not windy enough. Or it might rain. Yet, the reality is that most days would be just fine and present a wonderful opportunity to be on the water—and I'd wish I'd have gone out.

So what does this have to do with investing? Some investors find themselves in a similar pattern of behavior when it comes to making investment decisions. The conditions are seldom, if ever, perfect for investing. The stock markets are overvalued, the trend for the stock markets has been negative or too positive, interest rates are too high or too low, the Fed is tightening or is too loose: These are just some of the hurdles that people put in the way of making decisions to invest.

But wait a minute! Isn't not choosing to invest really an investment decision? In reality, it is. The funds are always somewhere, whether in cash, money market accounts or other investments. While an investor may protest and say their non-decision is only to protect capital, the reality is that the facts simply don't support that view.

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Dalbar, a leading research firm in financial services, has conducted an extensive study for the last 20 years, examining the impact of investor decisions on their results. In the table below, note the large discrepancy between investor results and investment results. The message is: Investments perform better than investors. Yes, investments perform better than investors! Why? When people only invest when they feel good about current market conditions, they endure a large negative impact on their results.

The evidence against market timing as a successful strategy is overwhelming. Investors often don't look at their decisions as market timing, but too often they are. Too often they become mono-focused on the stock market as if it were the only investment choice available when in fact contemporary portfolio design will incorporate in a portfolio several non-market selections that exhibit low to negative correlation with the market. Adding non-traditional investments, such as managed futures, absolute return strategies, etc., to reduce volatility and deliver reasonable returns helps your portfolio meet your goals and dreams.

In my professional tenure, I have had the opportunity to work with many clients and have seen the impact their financial decisions have had on meeting and achieving their needs, goals and dreams. Those who thought of their investment decisions through a matrix of risk and reward over the long term and acted on those decisions through a well thought out, intelligently diversified portfolio were able to get where they were headed with a high probability of success. Those who became frozen in place, also with a high probability, ended up disappointed and frustrated by not being able to meet the goals and dreams they envisioned.

Getting back to my boating analogy, I'm sure it occurred to many of you that there are times when weather conditions are so severe that taking the boat out would be silly. I agree! Yet, most of the time, when the potential for less-than-favorable conditions exists, it doesn't come to fruition. Even if it does, with the proper plan and equipment, the true boating enthusiast has nothing to fear.

When it comes to investing, market storms come and go, but with a well-designed strategy—using a broad base of asset classes and accounting for many likely yet unpredictable scenarios—you can weather them quite well.

Bob Klosterman, CFP, is the Chief Executive Officer and Chief Investment Officer of White Oaks Investment Management, Inc. (opens in new tab), and author of the book, The Four Horsemen of the Investor’s Apocalypse.