Published on LinkedIn – October 2017

Let me start by unpacking the word “investor.” According to Investopedia, an investor is a person who commits capital with the expectation of financial returns. Thus, by definition, investment requires 2 key elements namely commitment (time & dedication) and an expectation of a particular nature and level of return.

The nature of return is linked to the risk and predictability of the return i.e. is the return stable or does it fluctuate to a low, medium or high degree; is the bulk of the return capital in nature or from interest, dividends or rental income; and what is the risk of long term capital loss? It is important to note that the expectation of the level of return is strongly related to the nature of the return i.e. if you are to invest in something that carries more risk, you would usually expect a higher return (in the long run) to compensate you for the risk.

Investors thus have a good understanding of what they are investing in to ensure that it meets their objectives and risk appetite and their expectation of financial returns is realistic in relation to the level risk that they are taking on. They are forward-looking and unless something fundamentally changes they stay committed and give the investment sufficient time to deliver the return.

A DIS-investor, on the other hand, tends to dis-allocate capital by continually withdrawing from investments. Of course, there are valid reasons for disinvesting for instance if you need the capital, something has fundamentally changed with the nature/type of investment, or if your objectives/needs have changed.

However, in many cases, DIS-investors are not withdrawing for these reasons but rather because they believe that their investment has not met their expectations. Signs of such behaviour are long-term investments that are cashed in within 2 to 3 years and where investors continually switch out of the investment funds that have been the lowest performers in their portfolio to those that have been the highest performers purely on the basis of short-term performance.

This is akin to driving a car by looking in the rearview mirror and is incongruous with the way that these funds are managed with fund managers taking a 5 to 10-year view on any share/stock position.  Unfortunately, the reality is that last year’s best performer is seldom this year’s best performer which results in DIS-investors constantly switching at the wrong time and destroying the long-term value of their investments. Of course, much fault for this behaviour lies in the way that investments are reported on with fund fact sheets and annual performance reviews highlighting short term 1 year and 3-year performance figures. This emphasis on historical returns may also be to blame for investors’ expectations of future returns being unrealistic based purely on past performance which may not continue in the future (after all the world we live in today is very different from 5 or 10 years ago).

Being an investor is thus a challenging role to take on. A forward-looking approach is crucial, requiring planning, knowledge/advice, commitment (time and dedication) and an ability to see through the noise   – very difficult in today’s world of instant gratification and constant information and news flow!