Recent Losses Continue to Haunt Equity Investors – On Wall Street

“Financial losses have a much greater impact on investor psyche than do equivalent gains.”

In this article, Tom Roseen makes a few good points. I won’t go through them all, however these couple of points are noteworthy:

“Studies report that the pain of losing money is two times greater than the elation of winning an equal amount.”

“Over the last 87 years the number of years of equity outperformance (63) handily beat the number of years of underperformance (24). Armed with this knowledge, we shouldn’t let the fear of loss alone drive our investment decisions. Instead, we should take comfort during tough times by sticking to our asset allocation strategy, supplemented by a regular periodic rebalancing-forcing us to buy low and sell high, just at the time we might rather do the opposite.”*


When Roseen talks about “net flows of money” this is because this is a good indicator where the “lemmings” are running and whether the herd is fearful or greedy. This behavior is damaging and Dalbar studies show this consistently over time as well…

“However, if we look at the distribution pattern of returns over the last 10 years, we see the historical pattern of three down years and seven up years still holds. While the average equity fund return for the 10-year period (+4.42%) lags the 87-year average of 8.42%, investors who stayed out of the equity markets missed some very strong returns and probably are still in the red.” (text bolded for my emphasis).

While 3 down and 7 up is a generalization, the point made is that there are down cycles as well as up cycles. You savings plan (pre-retirement) and distribution plan (retired) should incorporate these realities … thus there should be no surprise and even though you feel fear, the broader plan should still hold.

Recent Losses Continue to Haunt Equity Investors – On Wall Street.

*See the chart at the bottom of Roseen’s article … it is quite illuminating.

See also   Panic? Why?   Cycle of Market Emotions.


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One Response to Recent Losses Continue to Haunt Equity Investors – On Wall Street

  1. Larry Frank, Sr. May 22, 2017 at 9:10 am #

    A number of recent work has found that DALBAR overstates the effect of investor poor decision making. However, there still is a tendency for investors to hurt their returns through bad decisions nevertheless:

    Blanchett: “Mutual fund investors haven’t made exceptional timing decisions, but they haven’t been nearly as dumb as the DALBAR numbers claim. It’s hard to beat the market – especially through market timing – and few investors have been able to do it consistently for any reasonable time period. Investors and financial advisors should follow a disciplined approach that is focused on staying invested for the long-term rather than trying to beat the average investor (whomever he or she may be).”


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