Written by: Teera Phutrakul Finansa Asset Management

Why Most Investors Fail

ore people will grow old this century than ever before. Within the next few years the proportion of people over 60 will surpass the proportion of under 5s and for the rest of history there are unlikely to be ever again more toddlers than over 60s. This will change the nature of retirement as we know it. The average retired person in the developed world now spends more than 20 years without a salary income, demands a better retirement than his or her parents and plans to retire earlier than past generations could contemplate. More than ever, individuals have to take responsibility for their own retirement as well as the lifestyle that they enjoy along the way. Many people have attempted to manage their own retirement investments, but few have succeeded. The hardest step to gaining an understanding of investing is accepting that most investors do not achieve a rate of return that exceeds inflation. Although, investing can offer greater potential for your money to grow, the world of investing can be a complex and confusing place. You could be planning your retirement, coping with a career change, saving for your kids education and trying to help your aging parents all at once. The decisions you make in each area affect all your other goals and because your situation and goals are unique, your financial strategy should be too. Here comes the hard part. According to research by the U.S. Group DALBAR, the average investors return is significantly lower than the market indices. Over the past 19 years, the average U.S. equity investor earned only 3.7% per annum and the funds they invested in returned 13.2% per annum over the same period. (Figure 1.) The reason why many investors fail is because they attempt to time markets, leading to dramatic underperformance. According to DALBAR, investors attempts to cash in on market gyrations. When the S&P Index rises, investors pour money into equity funds; when the S&P Index drops,
Figure 1.

the money going into equity funds declines. Emotions such as greed, fear and the herd instinct, rather than logic tend to drive the average investors behaviour. Attempting to time the markets can lead to dramatic underperformance. If an investor stayed invested in the S&P 500 index for 10 years up to December 31, 2001, the return achieved would have been 13% per annum. This return was halved if the investor missed the top 15 days over the 10-year period, and the return was negative if the investor missed the top 40 days over the same 10-year period. So successful investing depends on time in the market, i.e. how long your assets remain invested, and not market timing. Still a Good Bargain Despite the recent declines in global equities, there are signs that the fundamentals still remain favourable. The earningsyield gap, which measures the relative value of stocks versus bonds, shows that equities are still a better value, though less so than they were six months ago. (Figure 2.) Figure 2.

Source: DataStream as of April 20, 2006

Source: DALBAR, Quantitative Analysis of Investor Behaviour (QAIB) study, 2005

Saving vs Investing Saving means putting money aside to cover your short-term goals such as monthly living allowances. In a saving account your money is secure and generally accessible. However, in exchange for this security you will normally only receive a modest return, reflecting the current rates of interest. Investing is about aiming to accumulate money over the long-term in order to provide you with future financial security. It has the potential to bring you bigger rewards because many investments are linked to the movement of the stock market. However, because stocks can go down as well as up, it also carries a greater risk. A key determinant to your portfolios performance is choosing the allocation of your funds between the four asset classes: Cash, Bonds, Property and Stocks. Research by the Financial Analysts Journal indicates that up to 80% of investment returns are (over time) determined by the
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asset allocation decision, making one of the most important decisions an investor has to make. Each asset class (in the table below) has unique characteristics in relation to risk and as a general rule tend to work counter cyclically. For example, when interest rates are high, share markets are likely to be low, as investors will favour the lower risk associated cash and bonds. Conversely, when interest rates are low, investors will accept share market volatility if it brings the prospect of higher returns. Asset Class Cash Bonds Property Equities Historical Long-term Real Return % p.a. 0-1% 0-3% 1-5% 5-9% Whether you are an income-oriented or growth-oriented investor, there are basically three ways to invest: Direct investing - buying stocks and bonds direct. Although with this avenue investors feel in control of their choices, the investments they choose are often based solely on their popularity and high past returns as investors find themselves without the time nor the expertise to do the proper amount of research required. Mutual funds - developed to overcome the disadvantages of direct investing. Whilst mutual funds have the advantage of being tax efficient and professionally managed full time, there are no structures in place to monitor the fund managers. People usually select funds by using brand and convenience as their only guide. Multi-manager service - designed to overcome the disadvantages of mutual funds. With hundreds of mutual funds to choose from, how can you be sure to make the right choices? Investing through a multi-manager service has become one of the most popular methods of investing in the U.S., the UK and Australia. With this Best of Breed investment approach an investor can be assured of regular monitoring by a professional financial planning team in addition to well-researched, concise and consolidated reporting. Teera Phutrakul is Executive Chairman of Finansa Asset Management. He may be reached at: teera@finansa.com

Income vs Growth Some people, for example those who are thinking of retirement or who are no longer earning a regular salary, may choose to invest their capital to get a regular income, this is called investing for income. But some people invest in order to accumulate a lump sum that they can then use to cover major expenditure in the future such as their childrens education, family weddings or a second holiday home, this is called investing for growth.