Financial Focus: The Evolution of the investor
By Craig Elder on June 29, 2019.
Developed over tens of thousands of years, the deeply ingrained instincts that kept us alive for so long now often work against us as investors. But there is hope for us yet. In one form or another, humanoids have roamed the Earth for more than two million years, slowly developing into what we call homo sapiens more than 300,000 years ago. It was a precarious existence for our ancestors, having to survive in a hostile world with multiple threats, including animals, disease, the elements and each other. To survive, we developed key instincts, such as the all-important fight-or-flight. Sizing up a one-on-one with an ornery woolly mammoth, your instinct would likely (and wisely) have tended towards a flight to safety. But what if you are backed by 50 of your spear-wielding mates? That same beast was a tempting dinner. So, we began to realize that there was “strength in numbers,” and that it was better to fit in with a tribe than to be on the outside looking in. We came to rely on the tribe for our survival. Gradually, mankind developed laws, policies and regulations – and the institutions to enforce them – to help eliminate many of the ancient threats to our survival. But the same instincts we honed to survive can cost us when it comes to investing: 1. Fight-or-flight: Research has consistently found that, due almost entirely to emotional reactions during periods of market stress that resulted in poor timing decisions, the annual return of an average investor over 20 years was significantly lower than that of the S&P 500 Index, and resulted in a difference of $120,000 on an initial investment of $100,000 (Dalbar, 2017). 2. Herd mentality: Evidence shows that investors “follow the herd,” consistently buying high and selling low, which can hurt portfolio performance over the long term. As equity markets were soaring in the leadup to the financial crisis of 2008/09, so were equity fund sales. And following the crisis when equity markets tumbled, Canadians redeemed their equity funds (IFIC, Morningstar, 2018). 3. The tribal grapevine: Listening to the (unqualified) press – who are often rewarded for generating alarmist content – and friends and family for your investment information is fraught with risk. And, it is extremely difficult for even qualified forecasters to accurately predict where markets will go in the short term, and no forecaster has insight into your unique situation. There is hope for the modern-day investor or homo investorus. Today’s investors have the benefit of research, professional expertise, advice and well-regulated markets. A well-structured and thought-out plan based on your goals and risk tolerance is the best way to control your ingrained survival instincts and keep on track. Strategies such as regular investing can help us avoid emotional decisions based on short-term market movements. The first step to being a modern day – and successful – investor is to quell the caveperson within us. That then creates safety and security in the fact that, those who stand their ground against the real investment woolly mammoths are most likely to achieve their goals. A. Craig Elder, CFP, FMA, CIM, FCSI, is a Vice-President, Portfolio Manager and Wealth Advisor with RBC Dominion Securities Inc. in Medicine Hat. RBC Dominion Securities is a member of the Canadian Investor Protection Fund. Source material provided by RBC Wealth Management Services. This column is for information purposes only. Please consult with a professional advisor before taking any action based on information in this column. For more information on this and other financial strategies, contact Craig at 403-504-2723. 8-7
