Closing the Behavior Gap

Posted by Myles B. Brandt on 14 July 2009 | 0 Comments

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Over the long run, equity mutual funds can offer some pretty attractive returns. Ibbotson SBBI research shows that Large Stocks have returned an annualized 9.6% from 1926 to 2008. All too often an otherwise rational person will have an investment experience that doesn’t measure up to market returns. Studies suggest that investors actually under-perform the funds they are investing in. How could that be?


It’s called the “Behavior Gap;” the gap between a mutual fund’s return and the investor’s returns that are attributable to behavior. Carl Richards, a fee-only financial advisor has spent his career studying and raising awareness of the Behavior Gap. Please visit to learn more and sign up for his “Once Daily” newsletter.


Generally, when investors let emotion rule they want to invest when they see big returns in the market – at the market top. They also want to get out when they see big negative numbers – at the bottom. As an example Carl cites that from 1984 to 2004, the average stock mutual fund returned 10.7% annually, and you would have too if you had held it and didn’t change your position. What did the actually investor get? Better sit down: 3.7%. THAT’S 7% A YEAR! Investors are getting ripped off by their own behavior by 7% a year. There is some excellent material on Carl’s website; such as “The Behavior Gap: A Snapshot” and “A Manual for Scary Markets.” Both are under “The Lab” tab.

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