The emotions of investing
Chris Broome – Chartered Financial Planner
“The investor’s chief problem – and even his worst enemy – is likely to be himself”
Benjamin Graham (Graham and Dodd, 1996)
Humans make poor investors. The ‘X’ (or reflexive, rather than ) system is an ancient part of the brain responsible for processing risk and fear, which plays a key role in motivation and reward-seeking behavior, and importantly in our aversion to risk. Useful when next to a lion rustling in the bush – less so when applied to making sensible long term investing decisions.
Research by Morningstar shows a ‘behaviour gap’ of 1.1% per year in the US – around 15% of the overall growth seen in the 10 year period studied. Dalbar find similar results over the past 20 years.
Sometimes, the best investment decision is doing nothing at all.
But there’s good news…
Vanguard suggest that financial planners can add around 3% per year in net value – with half of that coming from behavioural coaching (this broadly aligns with the figures presented above).
Sound advice can help close the gap between investor returns and investment returns.
Next steps
If you’d like to review your financial plan or simply want to talk things through, we’re just a call away. Contact us
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Sources: Morningstar’s Mind the Gap (2024), Dalbar QAIB 2025 Report, Vanguard Adviser’s Alpha (June 2020)
