Invest with head, not heart



Kim Inglis, QMI Agency

, Last Updated: 2:32 PM ET

According to BlackRock, the average investor underperforms virtually all other traditional asset classes and even inflation.

When comparing 20-year annualized returns by asset class, the average investor rings in at 2.3% compared to the S&P 500 Index at 8.2%. This underperformance is largely attributed to behavioural finance.

Studies show that investor emotions are predictable and in sync with market cycles.

In a bull market, investor emotions have an upward trajectory from positive to confident, then thrilled, and peaking at euphoric. When markets fall, the emotions track downward accompanied by surprise, nervousness, worry, and desperation. The descending emotional path ends in panic and defeat.

As markets bottom out and start to regain some steam, hopeful and encouraged investors cautiously re-enter.

Unfortunately, emotions rule and most investors exit their investments at the bottom.