Do you know what drives your investment returns? If you’re like most people, the first thing that comes to mind is probably market performance. The reason you think this way may be due to the fact that many advisors consistently tell their clients the same lie: that the performance of your investments is the key factor in a successful retirement strategy.  

The problem is, performance is not the ultimate deciding factor in successful investing. But if it’s not about returns, then what truly matters when it comes to long-term investing results? The truth is that long-term, real portfolio returns are typically less affected by the relative performance of investments. What drives returns more is the behavior of the owners of those portfolios, according to research by Vanguard.

Behavior And Investing

If an investor’s behavior is influenced by the lure of performance, it could cause them to make unwise decisions that put their financial future in harm’s way. The truth is, there’s no beating the market over long periods, and attempting to do so is time-consuming and potentially dangerous. A 2015 DALBAR study, Quantitative Analysis of Investor Behavior, showed just how poorly investors perform relative to market benchmarks over time. What turned out to be the biggest reason for underperformance by investors participating in the markets? Their decisions. Behavioral biases, such as focusing on investment performance, lead to poor investment decision-making.

Many investors fall prey to emotional decision-making and, in an attempt to avoid losses or cash in on a potential victory, they buy high and sell low. This behavior lowers their overall return and puts their financial plan in jeopardy.

How Important Is Behavior?

The annually updated research that DALBAR provides shows the importance of behavior in numbers. Using data from mutual fund sales, redemptions, and exchanges as the measure of investor behavior, the study shows that there is a sizable difference between the 20-year average compound rate of return of the average large-cap mutual fund in the U.S. and the average return realized by the average equity mutual fund investor. For example, in 2015, the 20-year annualized S&P 500 return was 8.19%, but for the average equity mutual fund investor, it was 4.67%. Although the numbers will change from year to year, the relationship between the two stays rather constant.  

Over 20-year periods, the average fund investor ends up with less than half of the return of the average fund. In a financial world where almost every advisor is touting his ability to outperform the market as the reason he is better than the guy across the street, the sad truth is that his investor is underperforming his own investments by a large margin.

Women And Investing

We all know that there are vast differences in how men and women think and act. That’s no different when it comes to investing. While both genders have strengths and weaknesses in this area, women tend to be less prone to rash financial decision-making. In general, women take less risk, trade less frequently, and focus on their long-term goals instead of market ups and downs.

In a 2015 Betterment study, researchers found that their female customers changed their asset allocation 20% less and tracked their accounts 45% less than men. Why do these two statistics matter? For one, frequent asset allocation adjustments can be a result of market timing, which only hurts your long-term returns. Second, the more you monitor your accounts, the more you lose sight of the goal of your savings: retirement. Short-term declines may cause you to panic and make corrections and seeing increased growth as a result of market highs may tempt you to engage in risky behavior to capture more of those returns. The fact that women take part in these behaviors less puts them a step ahead.

On the flip side, the patient and conservative stance women often take with their investments can be a side effect of feeling financially insecure. In a report published by Merrill Lynch, 55% of women surveyed reported that they know less about investing and the markets than the average investor. This lack of confidence could lead to many women not investing at the appropriate risk level and making decisions based on fear rather than proven financial principles.

Keys To Success

A goals-based strategy with appropriate allocation and diversification coupled with successfully managing investor behavior will account for 90%+ of real world investor return over time. Furthermore, working with a trusted financial advisor who understands that investor behavior can help you avoid mistakes and safeguard your financial plan. Here are a few ways to use your behavior to help your investments instead of hurting them:

  • Keep a long-term perspective. The markets fluctuate every day. You’ll only cause yourself undue stress and make emotional decisions if you monitor your performance and adjust your investments every time something unexpected happens. It’s more important to maintain a long-term view and stick to a disciplined approach.
  • Look for cost-effective investments. It’s basic math — gross return less costs equals net return. Avoid investments with high costs or hidden fees, which can drastically eat away at your assets over the long-term.
  • Rebalance to maintain proper allocation. We like to meet with our clients regularly to review their portfolio and rebalance as needed. This helps ensure that your portfolio still reflects your appropriate level of risk and is adjusted for any significant changes in your life or drastic market fluctuations.

The Performance Measurement That Matters Most

When it comes to investing, what matters most is not market performance or this year’s hot stock picks; it’s applying the right behaviors to a personalized strategy based on your specific goals and needs. Has your financial advisor talked to you about how investor behavior is a key determinant of financial success and how it is addressed in your retirement strategy? Or were you pitched on a value proposition built on the lie of outperformance?

By using a disciplined approach, focusing on the long-term, and working with an unbiased advisor who understands investor behavior, you can work toward your goals and a successful retirement. If you find yourself feeling less than confident about your current investment outlook and want to become better educated and fully engaged in your finances, click this link to schedule a call.

About Lisa

Lisa Strohm, CFP®, MBA is the founder and CEO of The Athena Network and Good Life Advisors of the Lehigh Valley, fee-based wealth management firms. She specializes in providing financial planning, investment management, and life management services for women and their families across the U.S. With more than 16 years of industry experience, she sets her firms apart from traditional wealth management companies by focusing on providing clients with an educational, collaborative, supportive experience that inspires her clients to engage in their financial lives. If you have a question, please click this link to schedule a phone call today. To learn more, visit https://the-athena-network.com/ or connect with Lisa on LinkedIn and Facebook.

Investment advice and financial planning offered through Good Life Advisors, LLC, a registered investment advisor.  Good Life and The Athena Network are separate entities.