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Tag Archives: behavior
Compounded annual returns are the crack of the investment world. Wall Street is the pusher and investors are the addicts. Investment companies and investors focus on the annual return metric as the most important in a portfolio to the long term detriment of most investors. This myopic focus on annual returns is bad for investors’ wealth wether they are in the wealth building phase or the withdrawal phase of their investment lives. Lets look at how bad and expensive this unhealthy obsession can be. First, lets look at the case of the investor building future wealth. In a world where … Continue reading
Today I wanted to touch on another common behavioral issue that most investors fall prey to, anchoring. I’ve commented previously on the behavior gap, how behavioral issues lead to investor under performance and specifically how more information often leads to worse investment performance. Anchoring is another behavioral pitfall for investors. I’ll describe what it is first and then show a common way it affects income investors. Anchoring describes the effect of irrelevant numbers in people’s behavior. It turns out that irrelevant numbers impact our decision making in dramatic ways. James Montier in this piece on behavioral issues uses the following … Continue reading
**Image by Carl Richards, Buck’s Blog at the NYT. Check out the blog for more simple yet powerful investment messages. Behavior dominates investor under performance. As the simple yet powerful chart above so nicely illustrates investor returns are lower than the very investment classes they are invested in regardless of the absolute performance these asset classes. This is the so called behavior gap. All of us have a host of behavioral biases that are constantly driving us to make the wrong investment decisions. We are not the rational automatons that efficient market theory or classical economic theory assumes us to … Continue reading