Investment Returns Vs. Investor Returns: Bridging The Behaviour Gap
Thu June 28th 2018
Have you ever wondered why your investment portfolio isn’t performing as well as the markets? Are you disappointed in the rate of return from your investments? Well, rather than the actual investment being the issue, the problem may well be due to investor behaviour.
Have you ever wondered why your investment portfolio isn't performing as well as the markets? Are you disappointed in the rate of return from your investments? Well, rather than the actual investment being the issue, the problem may well be due to investor behaviour. In this article, we look in detail at the issue of investment returns versus investor returns and we also examine how to bridge what New York Times journalist Carl Richards has called the 'Behaviour Gap'.
Definitions – Investment Returns & Investor Returns
Quite simply, investment return is the interest earned by your investment portfolio over a period of time. Investor returns, on the other hand, is how your portfolio performs over a set period with all your actions and biases taken into account. The truth is average investor returns are significantly less than investment returns. Why is that? Well, lots of investors suffer from inadequate planning and poor timing decisions. This behaviour is best illustrated by way of an example. An investment fund advertises a 10-year return at 10 per cent; however, in reality, very few investors actually stay the course. Often they will withdraw their funds before the end of the long-term period which means they receive a much lower rate of return. Buying high and selling low is a common mistake made by investors worldwide.
It's this difference between investment returns and investor returns that Carl Richards has appropriately named the 'Behaviour Gap'. So, why do we do this? What influences our behaviour? In order to change, we must first understand why investors behave the way they do.
Investor Behaviour – Key Influences
When it comes to making investment decisions, we are influenced by a number of factors. Often people are guilty of chasing returns rather than sticking to a plan and so sell the wrong investments at the wrong time and for the wrong reason. We may be influenced by friends, family and what we read in the media and make investor decisions in response to bad economic news or turmoil in the markets. People tend to be loss averse and, therefore, feel the pain of any losses more intensely than they experience the pleasure of a gain. Greed is another factor that may kick in, which can cause us to react but not always with the best timing. And there's always the potential for the latest fad to catch our attention. How many people have jumped on the bitcoin bandwagon for example?
Making The Right Investment Decisions
Investing isn't a sport. It's not a competition and it shouldn't be about being number one. To bridge the 'Behaviour Gap' and succeed at investing requires a long-term approach. It means staying focused on the end goal and not allowing yourself to be thrown off course by outside influences.
And so if you have been disappointed in the returns from your investment portfolio, then it may be time to examine your own behaviours and make some changes.
Stay On Track With Cave Financial
Our clients get returns that match expectations more often because our main focus is on getting the initial strategy right and then working continually with clients to help prevent rash decisions that create the gap between investment returns & investor returns.
If you have investments that you aren't entirely happy with, or we haven't answered all of your questions and you would like some personalised advice, feel free to call us on 09 985 3033 or email us (without any obligation).
Until next time,
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