The Value of Advice and the Price of Emotion

The Value of Advice and the Price of Emotion

The gross underperformance of the average equity investor in 2011 clearly displays what has been the case for over twenty-five years –irrational decisions lead to inferior results.  This is not just the case on a year-over-year basis, but for intermediate and long-term results as well.


While fees have been an incredible focus of popular media in its assault on the wealth management industry, we believe that fees are not the sole enemy of investors, and that paying fees for professional advice could indeed help save you from other key sources of investment pain, most notably, the price that emotion plays on your investment returns.

DALBAR, a respected investment consultancy, publishes a report it entitles the Quantitative Analysis of Investor Behaviour a report that takes into account all the inflows and outflows of mutual funds in the United States over the past 25 years, and then compiles the actual investment returns of investors, related to the average investor versus the return of the average fund.

I’m willing to concede for the purpose of this piece that the average fund will almost certainly underperform its benchmark over time.  As most of the world’s funds are managed in a benchmark sensitive manner, by adding up all the incremental investment calls and removing investments fees, you will most certainly get a return over time that is the benchmark return less fees.

What the DALBAR study shows, is that in the US, where a large proportion of clients are self-directed (in Canada a much higher percentage of clients are advised by financial planners, investment advisors or the like) and make their own investment decisions, that their investment timing decisions have had a significant negative effect on their results.

This is the closest we can get to  gauging how individuals do when left to make decisions themselves, and the negative impact that emotion has on investment returns.


Avg Equity Investor



20 Year




10 Year




5 Year




3 Year




12 months




Source: Dalbar QAIB, 2012

While some wealth managers can be criticized for succumbing to the same emotional response as the investing public, waiting until it feels good to invest, sitting on cash until things get better against the advice of your trusted investment professional may often be the wrong decision.

A famous Buffett quote is to ‘be fearful when others are greedy, and greedy when others are fearful’ by having a trusted relationship with your advisor, it may just be the right thing to hold your nose and invest; or take some money of the table when things seem like they couldn’t be going any better!

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