Sunday, 17 November 2013

'Being human" costs the average investor around 3 - 4% in return every year.

The cost of being human

When it comes to investing, human nature doesn’t help. Our innate need for emotional comfort is estimated to cost the average investor around 3–4% in returns every year.* And for many, the figure can be much greater.

This shortfall in returns is partly caused by what is known as the Behaviour Gap. It explains the difference between long-term financial returns (if we were only to stick to sensible and simple rules for investing) and actual returns (which are determined by all our short-term decision-making, often based on our emotional needs).

A good example is how our investment strategy often goes off course in turbulent times. So despite the obvious costs, we can often end up buying high and selling low.

*Source: Barclays Wealth & Investment Management, White Paper - March 2013, ‘Overcoming the Cost of Being Human’.

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