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Life & Money: Behavior Gap

Life & Money: Behavior Gap

January 21, 2022
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There’s a difference between investment returns and investor returns… and only one of them matters.

If a mutual fund yields 10% a year for 10 years, that is the investment return.

Now, let’s talk about investor returns. The only way you’re getting that 10% a year for 10 years is if you don’t touch that investment for the whole 10 years. No adding, no subtracting. Buy it and leave it.

The problem is, very few people invest that way. On average, we only hold long-term investments for two to three years, and then we get distracted by the next hot investment. Investors almost never earn the same return as investments because we don’t hold on to the investments long enough.

The return happens… we just aren’t there to get it. And the only reason for that is our own behavior.

We think the job of any self-respecting investor is to constantly be searching for the best investment. But that well-intentioned behavior consistently leads us to buy investments that have just done well and to sell investments that have recently done poorly.

In other words, we buy high and sell low, over and over again. And it’s that repeated behavior that leads to the difference between investment returns and investor returns.

There’s a name for this phenomenon.

It’s called The Behavior Gap