Buy low, sell high; it would be an easy path to investing success if people knew how to control their own behaviour. Investors may know that they want to buy low, but there is no way to determine when low has happened. “I’ll get back in as soon as things start to turn around,” they might tell themselves. People will read this and think, “I don’t do that,” but this data from the Investment Company Fact Book, published by the Investment Company Institute shows that most people do. The green bars show the net cash flows to US domiciled equity mutual funds, and the brown line shows the total return of global equity markets.

When equity markets perform well, people are investing in equities. When equity markets perform poorly, people are pulling out. This is real data demonstrating real behaviour, and it shows that investors tend to buy high and sell low. If they know that what they are doing is wrong, why are they doing it? Equity mutual funds offer investors the opportunity to invest in countless different strategies implemented by just as many managers. Implementing a handful of different strategies in an attempt to beat the market plays directly into bad investor behaviour. Based on the data, when a strategy doesn’t work, investors think it’s time to sell (selling low), and when something does work, investors think it’s time to buy more (buying high).

These poor decisions can be attributed to the lack of a sound investment philosophy. When a sound philosophy is guiding the construction of a portfolio, investment decisions are based on goals, risk tolerance, and time horizon rather than performance. A guiding philosophy instills confidence in the strategies being implemented, and down markets become opportunities to rebalance instead of reasons to jump ship.

With a sound philosophy guiding portfolio structure, the investor’s focus is shifted from chasing unpredictable short term returns to staying disciplined and following a long-term plan.

original post at pwlcapital.com