The New York Times offers a preview of a soon-to-be released study by Philip Z. Maymin, an assistant professor of finance and risk engineering at Polytechnic Institute of New York University, who studied comprehensive records kept by the investment firm Gerstein Fisher from the firm’s founding in 1993 to mid-2010.
The study, which will be published in the spring edition of The Journal of Wealth Management, found that the value of investment advisers was not in the stocks or mutual funds they recommended but in their ability to restrain investors from impulsively trading at the wrong time. It cites data showing that aggressive orders by individuals can cost them about four percentage points a year. (my emphasis added)
Addressing the urge to trade after increased market volatility, the article states the following:
“The urge never goes to zero,” Mr. Maymin said. “People who want to trade aggressively, it will never go away. If the market is volatile, it increases.”
More than that urge not going away, the Maymin-Fisher study found, it reappears just after a sudden rise or fall in the market. In other words, investors did not trade in expectation of intense volatility or even during it, which might be rational. They waited until the period of greatest volatility had passed and then looked to do what any adviser would tell them not to do: sell at the bottom or buy at the top.
We see this play out on a regular basis. Those financial advisers that are of the most value to their clients are the ones who are successful in keeping their clients invested in good strategies through all the inevitable ups and downs. An advisor who can deliver four percentage points a year in alpha as a result of their ability to successfully manage investor behavior is worth every penny in fees that they receive.
Posted by Mike Moody 
