Trust and honesty are at the crux of a good advisor-investor relationship. But also important is a keen understanding of what really matters when it comes to long-term investing results. Many advisors fall short in this area because they consistently tell investors the same lie: that the performance of your investments is the key factor in a successful retirement strategy.   

The truth is that long-term, real portfolio returns are only minimally affected by the relative performance of investments.  However, they are definitely driven by the behavior of the owners of those portfolios.  All advisors want to tell their clients that their specific choice of investments outperform the investments of their competitors. The problem is, not only is that not true over periods of time, it just doesn’t matter that much when we’re thinking about long-term retirement planning success.

Behaviors That Diminish Returns

Simply put, there’s no beating the market over long periods oftentimes and it’s time-consuming and potentially dangerous to try to do so. A 2015 DALBAR study called Quantitative Analysis of Investor Behavior showed just how poorly investors perform relative to market benchmarks over time. The biggest reason for underperformance by investors participating in the markets? Their decisions. Behavioral biases 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 lowers their overall return and puts their financial plan in jeopardy. Other behaviors that put your financial plan at risk are not maintaining a liquid emergency fund and drawing down your retirement accounts for non-retirement expenses.

The Importance of Behavior

The research that is updated annually by DALBAR shows the importance of behavior in looking at the most recent 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.  Although the numbers will change year to year, the relationship between the two stay fairly 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 truth is his investor is underperforming his own investments by a large margin.

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, that understands that investor behavior is the key determinant of financial success, can help you achieve higher returns by avoiding mistakes. Here are a few ways to use your behavior to help your investments, instead of hurting them:

  • Look toward the long-term. The markets fluctuate every day. You’ll only feel more stressed and make more emotional decisions if you monitor your performance and adjust your investments every time something scary happens. It’s more important to maintain a long-term perspective and 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. I like to meet with my clients at least once a year to review their portfolio and rebalance as needed. This helps ensure your portfolio still reflects your appropriate level of risk and is adjusted for any big changes in your life. If you have a long-term investment horizon, there’s no need to rebalance more often than that.


The Performance Measurement That Does Matter

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 the key determinant of financial success and how it is addressed in your retirement strategy or were your 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 advisor that understands investor behavior, you can work toward your destination and a successful retirement. To learn more about your investment portfolio and what does matter for your specific situation, call my office at 770.249.7424 or email me at to schedule a consultation.

About Beau Henderson

Beau Henderson is a financial advisor, author, coach, radio personality, and CEO of RichLife Advisors. He has helped over 3,000 clients to not just improve their relationship with money, but to live the life of their dreams.

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