You may be wondering, why, out of all the things to focus on in the financial world, why did I pick investor behavior? There’s an easy answer: because behavior is really the only thing that matters in investing. For over 10 years, I’ve watched the same thing happen again and again: the real life return of the AVERAGE INVESTOR is dramatically lower than the return of the AVERAGE MUTUAL FUND. And I’ve found that you can trace the majority of this gap directly to investor behavior.
We all know people who try to “play” or outguess the market with less than stellar results. Investors are only too willing to believe they somehow know better. Without fail, my experience has proven that if I can correct investor behavior, investors can enjoy solid returns that lead to financial freedom. That’s why the Behavior Gap is so important.
Identifying the Problem
One of the first steps in fixing any problem is recognizing that one exists. That’s why I’m hoping to start a conversation around the Behavior Gap because it can help people see the real problem. For example there are really only three things that determine returns:
- Asset allocation
- Fund selection
- Market timing
But in reality, only one matters: asset allocation. Asset allocation (how we divide our money between stocks, bonds, and cash) is the only decision that we have control over and the evidence shows it is the only on that matters anyway. The other, market timing and fund selection, have really been proven to be fool’s games that should only serve as entertainment.
During the coming days, weeks, and months, I’ll be exploring how different factors contribute to the Behavior Gap and how to counter their impact.
The Behavior Gap Snapshot
To help explain the gap, I recently completed a white paper call The Behavior Gap Snapshot. It’s available for free here, and you can also find it in the Library portion of this site. Please share it with anyone you think might benefit from hearing about the Behavior Gap. I hope you’ll join the conversation and share your stories. My goal is to make behaviorgap.com a place of refuge for investors seeking common sense and sanity in a community that’s often short of both.
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