Behavior Gap


by Igor Tiguy, CFP®, AIF®, MSPFP, Director, Planning Services

Ever been struck by an idea that you just needed to get down on paper, but all you had on hand was a cocktail napkin and a sharpie? Well, that’s what happened to Carl Richards, a Certified Financial Planner™ and director of investor education for a community of independent wealth management firms throughout the United States.

Carl picked up that sharpie for the first time about ten years ago, when he read the latest report from a firm called Dalbar, which published annual data about average investment and investor returns. As a long-term reader, Carl noticed that something peculiar kept happening each year – there was a significant gap between average investment (mutual fund) returns and the average investor (holders of these mutual funds) returns. Carl saw that “investors were leaving money on the table…”, and wondered “…what was happening?”

In a recent article titled “Mind the Gap 2014,” Russel Kinnel shows that “some investors got caught leaning the wrong way, again.” This trend still continues ten years after Carl Richards first noticed it, with the average investor trailing the average investment returns by 2.5% over those ten years (ending December 31, 2013).

As a CFP®, Carl saw that the differences in investor and investment returns were much smaller for clients of financial planning firms. He realized that these differences in returns were in part due to the average “do-it-yourself” investor bad timing – explained by studies in behavioral finance, in part due to the lack of broadly available financial education, and in part due to the lack of strategic, goal-based, long-term financial and asset allocation plans. As an educator, Carl saw the need for simple and easy-to-understand, yet powerful, visual financial planning and investment tutelage, which led to the launch of Over the last decade, Carl has published over 300 “Behavior Gap” sketches, published the weekly “Sketch Guy” column in the New York Times, and appeared as an author or speaker in many other venues.

Over the years of working with clients and prospects, we at Twelve Points have also noticed this behavior gap. Unlike most aspects of consumer life in which individuals look to save money and buy less expensive goods and services, when it comes to investments, investors have the tendency to chase high-flyers and buy high, and then they further compound the mistake by selling low. People are emotional beings, and often, emotion drives their investment decisions instead of logic. We saw this behavior play out during the 2008 market crash, with investor money increasingly flowing into the markets in the latter stages of the mid-2000’s bull market, and with investors selling and realizing the losses at market lows — and we’re seeing aspects of this behavior play out currently. We’ve observed many investors who were scared out of the markets after the 2008 crash, at a time when markets where historically cheap, which presented a great buying opportunity. They remained on the sidelines for years, being emotionally unprepared or unwilling to get back in. Many sat on cash for over five years, before deciding to invest again recently, at a time when the U.S. market is, once again, historically expensive.

With this in mind, when working with clients, we create strategic, goal-based asset allocations – whichemphasize the long-term and aim to take the emotion out of investments. We also aim to create lower volatility portfolios, as investors are more likely to stay invested with this approach.   Most importantly, we are there to listen to the clients’ thoughts and concerns, while sharing experiences and guiding them through the peaks and valleys of the market.

In his effort to further financial awareness, Carl has recently made a number of his sketches available to financial advisors so they can, in turn, share them, spreading oh-so-necessary financial knowledge. Over the next several months, in our Behavior Gap series, we will dive deeper into a few of Carl’s classic sketches, covering topics such as: goal setting, the financial planning process, the need for advisors, diversification, and demystifying portfolio construction.

Thank you Carl for everything you’ve done and continue to do to advance and promote financial education!

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