The sitcom Seinfeld is widely regarded as one of the greatest TV’s shows of all time. In one of my favorite episodes, George Costanza (a lovable character but often plagued by ill-timed decisions and hair brained ideas) decides he will try to reverse his fortunes by doing (and saying) the exact opposite of what his ‘normal’ thought process would be. Turns out, this worked extremely well for ol’ George. He started dating beautiful women, ended up marrying a girl who was extremely wealthy and got his dream job with the New York Yankees. All of this by simply doing the opposite of what he first thought of doing which had previously lead to unhappiness and poor outcomes.
As we approach year end, I’m going to suggest that the average investor act like George. That’s right; do the opposite of what you are thinking. Why? Well, it all goes back to a study done by the Dalbar Group. This research firm is known for its studies on investor behavior. In short, they found over a 20 year period that the average equity mutual fund returned ~ 10% while the average equity mutual fund investor’s return was ~3%. Why the staggering difference? Their analysis was poor timing. The average investor bailed out when things looked scary and stocks were in a trough but piled in at the top. Basically, buying high and selling low.
In the investment management world, it’s known as chasing performance. Investors tend to jump into the hot stock or hot manager after a terrific year and shun the stock/strategy/manager after a relatively poor year or two.
Thus, back to George Costanza! If the average investor would have simply added to their holdings when they were down (or at least stayed put) and skimmed a little off the top (i.e.; rebalancing) when things got overvalued, then their George mindset would have saved them thousands of dollars.