The old tune by the Romantics entitled “Should I Stay or Should I Go Now” is rattling around in my head. That is what many people today are thinking about the stock market. 2002 was another negative year for the major stock markets around the world. That makes two negative years in a row for Canada and three years in a row for the US. Not unprecedented, but very unusual indeed.

For many investors, the natural reaction to these gloomy results is to be proactive and do something. Yet, as advisors, we often counsel our clients to be patient and remember that the professional managers who are running the funds are not idly standing by. They are making decisions on an ongoing basis in an effort to protect your capital and generate positive returns. Warren Buffet, perhaps the world’s best investor, said that some of the best investment moves he ever made were the ones where he chose to do nothing.

In November, I read an interesting article by Aaron Brown and Duff Young on Fundmonitor.com, a website that analyzes mutual funds and their performance. They compared the rates of return that Canada’s 100 largest long-term mutual funds have earned to the returns the average investor earned in those same funds. In their words, “(the result) was startling. The average investor posted returns over the 10 years ended September 30, 2002 that are four percentage points lower (annually) than the fund.” It turns out that only one in 17 investors outperformed the published 10-year return of the fund.

This study highlights two of the most common mistakes committed by investors: (1) investing in funds with recent strong performance, only to see those funds fall precipitously shortly after; and (2) bailing out of funds at or near their low point. This behaviour is borne out in the mutual fund industry’s net sales statistics, which show that Canadian investors, in general, were loading up on equity funds (particularly growth and technology funds) in the spring of 2000 shortly before the technology bubble burst. And now, as we bounce along what we hope is the trough of the current bear market, some Canadians have been redeeming their funds for the past eight months. For these investors, their timing has been all wrong.

But why are some investors getting it so wrong? Why is it that we can read these statistics again and again and continue to make the same mistakes? Investor behaviour is the main culprit. It is natural to listen to our hearts rather than our heads. Fear and greed are much stronger motivators than calculated, objective reasoning.

The investment industry is partly to blame, as well. Their advertising tends to focus on their recent successes, so they perpetuate the problem of chasing recent performance.

What can we do to combat the tendency to invest based on fear and greed?

If history is any indication, this recent period of negative returns should be followed by brighter prospects and positive returns. My prediction for 2003 is that patience and discipline will continue to be virtues for the successful long-term investor.