The Evolution of the Investor

Jul 11, 2019 | Jason David Smith


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Today’s investors have the benefit of research, expertise 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.

The Evolution of the Investor

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.

Surviving in a woolly mammoth world

In one form or another, humanoids have roamed the Earth for over two million years, slowly developing into what we call Homo Sapiens over 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.

But the same instincts we honed to survive can cost us when it comes to investing:

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).

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 lead-up 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).

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.

Homo Investorus: hope for the modern-day investor

Today’s investors have the benefit of research, expertise 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. And, to find 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.

If you like this and want to learn more about common investment biases and mistakes email me at jason.smith@rbc.com

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