Last week, Morningstar published their annual Mind the Gap report. This report discussed the difference between investment returns and investor returns. Their findings have not differed much from past years, indicating that investor behavior continues to be a drag on overall performance.
Morningstar reports that the primary cause of underperformance is the timing of purchases and sales of securities. Perhaps what is even more interesting is the differences in behavior gaps and what advisors can glean from that information.
A Deeper Look
The average behavior gap among equity funds over the last 10 years was 1.2%. The gap was larger among sector equity funds (1.5%) and smaller among asset allocation funds (0.2%). From this one finding, we can reasonably infer that investments that have larger price fluctuations (i.e. sector equity) may influence more trading, and the more we trade the more likely we are to make a bad decision.
Perhaps even more interesting was the behavior gap in the fixed income space. While equity investors attained roughly 85% of the return of the underlying investments, fixed income investors (muni and taxable) only attained 50% of how bonds actually performed. This isn’t about stocks vs. bonds. It seems to have more to do with unmet expectations and price fluctuations.
Vanguard opines that “behavioral coaching” is worth 1.5%. DALBAR demonstrates a significant historical behavior gap. And the Morningstar research confirms this. While the amount of the gap may differ due to time periods and methodology, the results are robust. As Benjamin Graham said, investors really are their own worst enemy.
– JAY
