Investor Behavior Risk Can Be Costly

Investor behavior can be more of a risk than investing in stocks, writes Peter Watson.

There are two types of investment risk and the one that is based on investor behavior can often be the costliest.

The timing of this article is Influenced by President Donald Trump introducing tariffs that caused significant stock market volatility. During some trading days investors lost significant amounts of money.

Investments in stocks can decline in value and therefore it is understood they can be a high-risk investment. Because they are high risk, investors require a greater potential return to invest in them.

The average annual return of stocks as measured by the S&P 500 has been just over 10 per cent annually over the last 100 years. That is a very attractive return.

Every time stock markets have declined in the past; they have fully recovered their value. Another way of saying this is that stock market losses have been short-lived because they do rebound.

If you are an investor the second risk to be mindful of is, you. Sometimes investors panic and after a stock market decline in value, they will sell their stocks. If you believe in the long history that markets will recover after declines in value, then you could interpret the motivation to sell as a mistake.

Stock markets do recover however If you’re investing in individual stocks there is no assurance a recovery in value will happen. Maybe they will not recover. That is why my recommendation is to invest in a highly diversified portfolio and not just rely on a few specific stocks.

In many cases when an investor sells their stock investments because of a potentially temporary decline in value it is a mistake.

Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com