There’s a strange phenomenon in the investing world I want to tell you about, a pattern I call the behavior gap—when investors earn less than their investments.
Let’s consider an actual case involving the Janus Enterprise Fund.
In March of 2007, the 10-year return of this fund was 9.44%.
Yet the average Janus fund investor got a return of -10.13% for that period, for that same fund.
That’s because investors tend to hold a fund for a period of time, often selling it when it cycles down, and missing out on long term gains when it cycles back up.
The behavior gap holds true for many people: The real-life return of the average investor is dramatically lower than the return of the average mutual fund.
Why? How? Investors lose money because of the way they behave: selling when their funds underperform, buying when they were soaring, giving into their emotions.
That’s investing like it’s 1999. It’s called “chasing returns.”
To make sure you don’t fall into the behavior gap, you need to do three things:
Think about your long-range plans, your life in 20, 30 or 40 years. Pick an asset allocation that works for you, and put money into the appropriate funds (consider target date funds or index funds). Keep your fees low.
Last, do nothing, except rebalance your account each year.
It sounds simple, but it takes discipline to stick to your plan and not get distracted by hot trends and promises of big returns.
Shake and bake. Does this recipe make sense to you? Does it seem too easy?
Carl Richards, aka “the napkin guy”, and father to three daughters and one son, is renowned for his weekly sketches on the NY Times Bucks Blog and is now a DailyWorth contributor.