The Importance of Working with a Financial Advisor
Why investors can get better returns with a financial advisor than trying to do it themselves.Share Transcript Return to Video Archive
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The Importance of Working with a Financial Advisor
From our beginning, we've built our firm in partnership with financial advisors for one simple reason: We think the skill set of managing a portfolio, managing assets, is different than the skill set of managing a client and managing their behavior. And yet both are important to the end result that the client achieves. So while Danton, I and our team come to work trying to generate good investment results over a long period of time, the real value that a financial advisor adds is in managing the behavior.
Dalbar has a study that shows over 20 years, while the average investment return has been around 9%, the average investor was only getting 5%. And the difference, that 400 basis points per year over 20 years, that difference was driven by the timing of the investment decisions.
Now what are the reasons for this? The reasons are often that they get excited when prices have gone up and they get depressed after prices have gone down, with the result that they end up buying high and selling low. But they also tend to react to forecasts. They read an article saying now's a good time to invest or now's a bad time to invest. And they react to it as if it somehow has great predictive value. And that can be dangerous. They also react to fads. Whatever is the fad of the day, people want to do that. We're social animals and tend to want to stick with the herd.
Now there are antidotes to this sort of behavioral penalty, to this timing penalty, but they aren't easy. They take discipline. It's the discipline to have an investment plan, maybe to engage a trusted financial advisor and then to stick with it through thick and thin. Now if they're able to do this, if they're able to close that timing and selection penalty, they're going to do much better toward achieving their end financial goals.
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Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2015) and Lipper. Dalbar computed the "Average Stock Fund Investor Return" by using industry cash flow reports from the Investment Company Institute to represent purchases and redemptions. The "Average Stock Fund Return" figures represent the average return for all funds listed in Lipper's U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of a "systematic equity" and "asset allocation" investor. The annualized return for these investor types was 3.2% and 2.1% respectively over the time frame measured. All Dalbar returns were computed using the S&P 500® Index. Returns assume reinvestment of dividends and capital gain distributions. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. The performance shown is not indicative of any particular Davis investment.
Shares of the Davis Funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.
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