InvestMENT Returns vs. InvestOR Returns
What’s The Difference?
And Why Is It So Important?
At first glance, ‘investment’ and ‘investor returns’ just seem like you are talking about the same thing, but it’s not.
In Daniel Crosby’s book ‘The Laws of Wealth’, he cites a great example of this. The best performing fund between 2000 to 2010, was a fund called ‘CGM Focus’, which was an equity (company share) fund.
The fund delivered annualised returns of 18.2% p.a., quite a track record for that period.
And what was the average investor return during that period? -10% total. Wow.
So what is the difference? Us, human beings.
What’s the lesson then?
It is that even if you were skilful enough to find the perfect company or fund to invest in over your investing experience, that alone is clearly not automatically the winning ticket.
The problem arises with two main biases we suffer from (among others), ‘Herding’ and ‘Loss Aversion’. To put this simply, in the context of any asset we can invest in when it is doing particularly well, we jump on the bandwagon and follow others into it based on all the success stories (Herding). But have most of the good times been and gone, and we are entering the fray just at the wrong time? Or, when an asset begins to perform poorly, instead of riding it out, we run for the hills and sell to avoid further losses (Loss Aversion). Or an equally common occurrence, is we take years to enter the markets based on fear of loss, because of recent market drops.
What lessons can we take away from this then?
- If someone is raving about investing in a certain thing quoting its performance, is that really the returns they have received? I doubt they can tell you the returns they have received…these are two different things.
- Don’t jump on the bandwagon….invest in things for your own reasons, not because everyone is claiming to make lots of money.
- Acknowledge that it’s going to hurt at times when things aren’t going to plan, but know this is the price we pay for getting the returns needed to beat both cash and inflation.
- Have some self-awareness to notice these behaviours in yourself, this seems obvious, but it’s not an easy skill to maintain.
- Put in place a plan for the way you intend to invest which matches your objectives and goals, then stick to your guns.
- Focus on the long term, not the short term noise.
None of this is easy to do, and it points out that although to some, the world of investing seems as though it will increasingly become the responsibility of algorithms and machine learning, this can’t be the case, as that would presume being able to predict the behaviour of all the human market participants…good luck with that! So remember, the more the short term euphoria/despair draws you in, force yourself to zoom back out and focus on why you are investing in the first place.