Behavior Gap in Effect Again

The behavior gap in effect.

In 2015, the average equity fund investor lost 2.3%, lagging the S&P by 3.7 percentage points. While that sounds awful, it’s actually a slight improvement in form. Over the past 20 years the lag was 3.52 percentage points, Dalbar reckons.

So who is to blame? As tempting as it is to point the finger at the financial services industry, the damage is self-inflicted. While it is well known that the majority of actively managed mutual funds lag the market, people keep using them in the hope that they have identified a winner. Then they pick another one and another.

One of the biggest ways we can improve as investors is to gain control over some of our irrational biases. It could be a system of checks and balances to slow our thinking down and prevent reactional trading. It might be as simple as employing a friend or family member to play devil’s advocate to run through a series of questions in order for us to engage our rational thinking system.

Overriding our short-term reactionary thinking system has clear measurable benefits.

Source:

The Market Rose, Your Portfolio Didn’t: Here’s Why (The Wall Street Journal)