Investor Returns Vs Investment Returns

Warren Buffet once said that he wouldn't mind if the stock market shut down for the next five years, an unusual statement coming from the man that some would say was one of the greatest investors of the 20th century. His quote says a lot about what makes him a great investor. Mr. Buffet is saying that he invests for the long run and doesn't need to know how much his investments are worth on a short term basis. The real message behind his statement and many others he has shared over the years is that the primary requirement for successful investment performance is excellent investor behavior.

Consider a study done several years ago by the Bogle Investment Center. This study found that the average equity mutual fund in the U.S. produced an average annual return, with dividends reinvested, of 9.6% from 1984 to 2002 (inclusive). During the same period, the average equity investor earned 2.7% in equity mutual funds. Clearly, the performance of specific mutual funds cannot account for the difference. Investor behavior (moving and switching) is the only logical explanation.

The point is that behavior, which is driven by one's beliefs or perspective, is the primary driver of investor performance, good or bad. Again, Warren Buffet: "Successful investing doesn't correlate with IQ... Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble in investing."

Your financial advisor should work to ensure that your investment performance is meeting the expectations of your financial plan by providing efficient, after-tax results. You should not only delegate the investment design and structure but also the necessary discipline to increase your probability of success.

Sometimes, investors can make a number of "mistakes" in thinking that wreak havoc on an investment strategy. Here are four major mistakes to avoid:

Mistake #1: People give too much credibility to recent experience and they project that experience into the future. This is also known as the "this time is different" syndrome. The investment bubble of the '90s was a classic example of this thinking.

Mistake #2: People who measure frequently change frequently, and this produces poor performance. Market returns do not come evenly over time. Successful investing is a long-term process and requires appropriate measuring disciplines.

Mistake #3: People are not willing to put the time into the markets in order to receive the benefits they offer in the long run. It is time in the market, not timing the market that matters most when it comes to successful investing.

Mistake #4: People avoid actions that confirm they made a mistake, even if it is the best action to take. Studies show that people will hold onto their mistakes too long in order to avoid having to admit that they've made one.

If you see yourself, or a friend, with any of these behaviors, ask yourself what perspective or belief leads them to think the way they do and have that friend call a financial advisor.

Ray Padron is the President and Chief Operating Officer at Brightworth. As a personal Wealth Advisor to high net worth families, Ray provides comprehensive financial and Atlanta investment management advice to help clients achieve their financial goals and dreams. Brightworth is an independent Atlanta financial planning firm that provides investment and wealth counsel to high net worth individuals, families and institutions. Learn more at

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