FinBytes by Finwisor - Behaviour Gap in investing

Investment returns and investor returns are 2 separate things. Most of the time investor returns are lower than the investment returns. This difference is referred to as the Behaviour gap. A study by Dalbar Inc. for US investors shows this difference to be at a shocking 7%!

What are investment returns?

The investment returns shown on websites and marketing material have an underlying assumption that you invest at the beginning of the period and then leave it alone. You do not buy more or sell. You do not change your mind to another fund.

What are investor returns?

Investor returns are your real-life returns based on when you buy and sell your investments.

What causes this gap?

Human behaviour is the biggest differentiator. Our emotions play havoc in our investing decisions. Better behaviour often means doing nothing.

Coronavirus – the current situation

When the markets had shown a run-up in October, 2019 the mutual fund industry saw investors starting to show interest for investing in equities. Right now when the market has fallen, the market is seeing panic and redemption pressures. This is a classic case of behaviour influencing decision making. Entering at peaks when there is euphoria in the market and exiting when there is fear.

Conclusion

While there is reasonable awareness about ~1% expense gap between direct and regular mutual funds, there is little awareness about the 7% behaviour gap. In the efforts to save 1% expenses on mutual funds, well meaning investors are unconsciously overlooking this 7%. Investors will do well to identify this behaviour gap in themselves by comparing their returns with the benchmarks. Those who are experts may continue investing independently. Those who lack time or knowledge of the equity markets will probably be placed better with proper advice.

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