The Importance of Working with a Financial Advisor
Why investors can get better returns with a financial advisor than trying to do it themselves.
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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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Davis Advisors is committed to communicating with our investment partners as candidly as possible because we believe our investors benefit from understanding our investment philosophy and approach. Our views and opinions include "forward-looking statements" which may or may not be accurate over the long term. Forward-looking statements can be identified by words like "believe," "expect," "anticipate," or similar expressions. You should not place undue reliance on forward-looking statements, which are current as of the date of this report. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate.
Davis Advisors investment professionals make candid statements and observations regarding economic conditions and current and historical market conditions. However, there is no guarantee that these statements, opinions or forecasts will prove to be correct. All investments involve some degree of risk, and there can be no assurance that Davis Advisors' investment strategies will be successful. The value of equity investments will vary so that, when sold, an investment could be worth more or less than its original cost.
Broker-dealers and other financial intermediaries may charge Davis Advisors substantial fees for selling its products and providing continuing support to clients and shareholders. For example, broker-dealers and other financial intermediaries may charge: sales commissions; distribution and service fees; and record-keeping fees. In addition, payments or reimbursements may be requested for: marketing support concerning Davis Advisors' products; placement on a list of offered products; access to sales meetings, sales representatives and management representatives; and participation in conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, and other dealer-sponsored events. Financial advisors should not consider Davis Advisors' payment(s) to a financial intermediary as a basis for recommending Davis Advisors.
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 Selected 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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