Successful Behavior

  1. Investors do not get investment returns they get investor returns, which tend to be substantially less. Investors do not merely underperform the market; they underperform their own investments.
    • Average annual return, with dividends reinvested, of the average U.S. equity mutual fund, 1996-2015 – 8.19%
    • Average annual return, with dividends reinvested, of the average U.S. equity mutual fund investor, 1996-2015 – 4.67%
    • Cost of inappropriate behavior – 3.52%
  2. The gap between investment returns and investor returns is fully and completely explained in 2 words: inappropriate behavior.
  3. As an investor, you cannot control investment performance, but you can control investor behavior.
  4. Avoid the 8 Great Mistakes:
    • Overdiversification – 5 categories, close to 5 funds will do it.
    • Underdiversification – Chasing the hot trend.
    • Euphoria/Overconfidence/Greed – The loss of an adult sense of risk. The perception of risk as ‘someone else getting a higher return’. Getting caught up in the success stories.
    • Panic/Get me out at any price now – Inappropriate temperament.
    • Leverage/Margin – Intellectually okay, behaviorally will not work.
    • Speculating instead of investing – Not seeing that you’ve crossed the line.
    • Investing for yield instead of for total return – Timing the market. Sure road to failure
    • Letting cost basis/tax considerations dictate investment decisions – “But I’ll have to pay taxes”. Be thankful.
  5. If you are successful in your investment behavior, our fund recommendations still may not, at any given time, outperform your neighbors’ funds, but, in the long run, you will surely outperform your neighbors.
  6. Most importantly FOLLOW THE LOVE. Who do you love and what do you want to do about it?