Restrain Yourself

It’s more difficult to spot our destructive behavior than others.

We all know investment advice like “buy low and sell high” and “don’t try to time the market,” but most people don’t recognize when they are doing the opposite.

Have you bought a fund in the last couple of years that was doing well (buying high) and is now ready to sell out since it has recently underperformed (selling low)?

Are you attempting to forecast the market and make drastic changes in your portfolio to take advantage of short-term tailwinds (timing the market)?

In the second video of this series, we remind ourselves of how investor behavior makes a big difference in long-term returns.

Read the Transcript:

Jason Myhre: “Restrain yourself. There’s an incredibly important personal dimension that we all have to reckon with if we’re going to be successful investors, and that is to deal with the enemy within. I want to introduce this to you by showing you an article from the Wall Street Journal.

Every decade there is crowned some new King of mutual funds, and so what we’re looking at in this article is the Coronation ceremony of the King of mutual funds for the 2000s, a fund called CGM Focus.1 You could see it got an impressive 18% annualized return. How do you think the investors in this fund did? Too bad investors weren’t around to enjoy much of those gains. The typical CGM focus shareholder lost 11% per year, for 10 years, according to investment research from Morningstar. This is the very best-performing mutual fund for a decade. The investors in that very fund are somehow managing to lose 11% per year. I mean, conceptually, how is that even possible that you could lose money on such a winning investment? Here’s what’s happening. These investors want to find a good investment, they’re wanting to grow their money, they go out and they find this fund. They say, wow, look at the return on this thing. So they buy it after it’s had a strong run of performance. So they’re buying it when it’s relatively expensive. The fund will experience a downturn. All funds have downturns, but they’ll make a mistake. They’ll hang with it for a while, but eventually, they’ll give up selling at a lower price. So they bought high and sold low. Low and behold, the fund will recover, we’ll put on another impressive streak of performance, and it will attract another set of investors who will buy it at a high, and who will later sell it at a low. This happens over and over and over again, such that on average the fund is doing very well, and on average its investors are doing very poorly.

We love to chase a hot return. We almost always give up when times are hard. If your mind is always wondering when’s the best time to buy and when’s the best time to sell, that is precisely the trigger you need to kind of turn off in your brain. The best mindset to have when you’re investing is how do I sit here, restrain myself, do nothing, and let that long-term performance trend that we saw in history play out in your favor over time.”

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