I’m waiting for my man
Twenty-six dollars in my hand…
He’s never early, he’s always late
First thing you learn is that you always gotta wait
I’m waiting for my man (Lou Reed)
© EMI Music Publishing
These lyrics are from a Velvet Underground (Lou Reed) song entitled, “I’m Waiting For The Man,” about a junkie waiting for and ultimately buying heroin from his drug dealer on a street corner in Harlem. I think there is an analogy to be made with this quintessential New York City rock ‘n’ roll song and the reported do-it-yourself investor freakout that resulted from their inability to log in to their investment accounts with such firms as Wealthfront, Betterment, Schwab, and Vanguard during the market downturn on Monday, February 5. The assumption is of course that most investors were fearful enough that they needed a “fix” — either to get information on their investments or make trades.
Many commentators want to point out that this is a failure of robo advisors and expand on their limitations, and certainly, there are some points to be considered there. But the real lesson from this is how many investors are significantly influenced by short-term fluctuations, so much so that their collective force can overwhelm financial websites. As opposed to instilling beneficial behavior and guidance to investors, these financial programs can instead facilitate and make it easier for investors to enhance bad behaviors that end up hurting many of them in the long run. It’s very similar to the relationship between a junkie and a drug dealer — it’s unhealthy and often has terrible results.
Investors need to realize if left on their own without proper guidance, they can be their own worst enemies. When they start feeling the sense of fear or greed coming over them, they’re tempted to act on those emotions, despite the fact that there is a significant amount of data to indicate that investor emotions can result in investment decisions that lead to significant long-term investment underperformance. Looking in the mirror closely and really allowing yourself to self-examine your emotions is often difficult but there’s reason to be encouraged and happy about the opportunities life and investing has to offer despite these challenges. Allow me to show you how that might be accomplished through a case study on investor behavior.
I think the following chart is interesting, in that it helps illustrate the power of having a good financial advisor. The chart represents dollar inflows and outflows of the “industry” (4,600 U.S.-domiciled equity mutual funds) versus a fund company that generally requires its individual investors to work with a financial advisor (Dimensional Fund Advisors or DFA). The assumption here is that most investors who are invested in DFA funds are working with a financial advisor and thus restrained from their junkie tendencies.
The most interesting point on the chart begins at the start of the financial crisis labeled on the x-axis as Q2 2008. You can see in the subsequent nine months through Q4 2008 (red circle), the “industry” saw investors pull approximately $250 billion out of their funds while DFA saw steady to slightly increasing fund inflows as indicated by the light blue line at the top. Most enlightening is that the chart indicates continued outflows from the “industry” funds through 2012 to the tune of approximately $550 billion, well after the markets began abruptly recovering in March 2009 — which indicates that many investors missed out on much of this recovery.
Chart Source: Dimensional Fund Advisors 2016
Why is this? Who or what is driving this investor discipline with the DFA funds? The huge disparity can be explained in large part to the idea that investors with appropriate financial education and guidance from a good financial advisor will get help when they feel the itch to satisfy their trading fix. Usually, the majority of investors who try to time the market and trade on fear or over-exuberance get lower investment returns than just a passive bucket of securities, which is an uninspiring outcome.
In the end, investing should be about peace of mind and benefiting those you love. You’ll be hard-pressed to accomplish those goals when your only resource is a 1-800 number or a blank computer screen. Interestingly and not just coincidentally, I did not receive one phone call from any of my clients on February 5, which I see as evidence that my financial 12-Step program has benefited my clients, who have all, at some point, wanted to satisfy their urge for another fix.
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