Carl Richards writing at the Bucks Blog and at his own site Behavior Gap has helped popularize the idea that investors are oftentimes their own worst enemy.  Buying high and selling low, therefore creating a “behavior gap” between the headline performance for various funds and investor’s actual performance.  You can see below how Carl has sketched out this idea:

Fear-Greed-Cycle

Source:  Behavior Gap

Now we have more evidence supporting this phenomenon.  Gregg S. Fisher writing at Forbes highlights a study that not only documents the behavior gap but also shows the toll that inflation, taxes and expenses also take on the average investor.  A 15-year example using the S&P 500 is shown below:

Source:  Forbes

Some of these factors like inflation are impossible to dodge, but others are within the domain of investors.  Fisher writes:

While these key detractors from investors’ bottom-line performance are not entirely surprising, it is interesting to note the extent to which the outcome here is also driven by a factor over which investors, in principle, have complete control: their own behavior. Indeed, fully one percentage point of the investor’s underperformance relative to the index can be attributed to trading activity.

The behavior gap is real, but like all biases is difficult to deal with.  The first step is to acknowledge that we have a problem.  The challenge is coming up with a strategy that provides a solution to our desire to unwittingly buy high and sell low.

For a more technical take:

“Past performance is indicative of future beliefs” by Philip Z. Maymin and Gregg S. Fisher, 2010/11. (Gerstein Fisher)

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.

Please see the Terms & Conditions page for a full disclaimer.