How does investor behavior affect real-life returns? For years, companies like Morningstar and Dalbar have done a bunch of studies on this question. Their studies try to compare the returns investors get to the returns investments get.

But is there a difference? You bet!

Time after time, the studies keep demonstrating that the investor returns earned over time are much lower than the returns of the average investment. What does it mean to you, me, and just about every other investor? We’re leaving money on the table because of our behavior.

We Don’t Beat the Market. The Market Beats Us

I've written about this Behavior Gap for years, and yet I still see people making the same mistakes.

For instance, it’s clear that buying even an average mutual fund and holding on to it for a long time has been a pretty decent strategy. But most investors didn’t do that. Instead, we move our money in and out of stock funds. Our timing is miserable, and it cost us dearly. In other words, we do exactly what we all know we shouldn’t do.

I also know it’s time to be cautious when I get lots of emails from readers of my New York Times column urging me to add stocks to my holdings. Likewise, I know it’s probably a good time to be hopeful about the market’s prospects when certain friends and colleagues are anxious to sell stocks.

What’s incredible is that they know it, too! We laugh about it together. They know their impulses to buy and sell are dangerous. It’s one of the reasons it’s so important to work with real financial advisors. You can rely on your advisor to help keep those impulses under control.

Yes, the Market Can Be Scary

Back in the spring of 2009, my clients were very worried indeed. Three of them came in together to see me one day. Like most of us, they were scared to death. The market had plunged, and they’d sustained significant losses.

The conversation quickly turned to how scary the stock market was.

Them:    Hey, Carl, we think it’s time to sell.

Me:    Are you suggesting that we sell something simply because it’s down 30 percent?

Them:    Well…you know…are we just going to keep sitting here while this thing goes down?

Me:    The damage has been done, guys. You may feel like selling, but does it make any sense to sell now?

Them:    It’s scary!

Me:    It’s okay to be scared, but it’s a bad idea to act on your fear.

Them:    But this is just too painful! If things continue at this rate, we’ll have no money by the end of the year!

Me:    Actually, stocks were a lot riskier when they were more expensive. But back then, you were happy to hold them. Why sell now?

Them:    So, what do we do instead?

My answer to that one was pretty simple. I told them we should do absolutely nothing. Instead, we’d wait for things to calm down a bit and then review their plans to make sure they still made sense.

Fast-forward a couple of years. The same three guys come to see me again. Stocks had rebounded sharply, and we had a very different conversation.

Them:    ​​​​Should we move more of our cash into stocks?

Me:    Uh, why?

Them:    Because the market’s done so well lately!

Me:    You mean you want to buy more stocks because stocks are more expensive?

Them:    Well, they might keep going up!

Me:    We have no idea what the market will do in the future. Why don’t we stick with our plan?

I have these conversations all the time. In early 2011, with gold up 80 percent over two-plus years, everyone wanted to know if they should be buying it. For a while, that was the most common question I got.

I answered that gold was now riskier than it had been in a very long time. If it wasn’t already part of their plan, why add it now?

We Need to Think Years, Not Days

About five years ago, I decided to totally ignore the stock market, especially breaking news about the stock market. I didn’t stopped investing, but since investing is meant to be done over decades, I had this crazy idea that maybe I would really, truly act out that whole long-term thing. That meant thinking about five years, 10 years, even 20 years from now. But I most definitely wouldn’t be thinking about what happened in one week, let alone one day.

So, I made sure I had a diversified portfolio of investments. And then, I proceeded to do nothing. I also ignored the stock market news entirely, which has been surprisingly easy.

I hadn’t thought about this strategy for a while until a friend texted me early on a Friday morning:

“Will you come talk to my co-workers?! They are talking about stopping their 401(k) contributions because of what’s going on! Driving me nuts!”

Still not quite awake, I replied, “What?”

Within seconds, he replied, “Stock market fell 500 points this morning, Carl! It’s all the way down to 17,537!”

My first thought: “Wow! The Dow is over 17,000.” And this is where things got a bit exciting for me as a financial professional. For the first time in five years, it registered: The Dow had gone from just under 12,000 to over 17,000. That’s a gain of almost 50 percent over the last five years. Now that’s what I call amazing!

Less amazing, however, is what the markets will do, or not do, over the next few days. So, it’s time to choose: five days or five years? Trust me. Your conversations (and your returns) will improve significantly if you choose the latter.

What’s incredible is that they know it, too! We laugh about it together. They know their impulses to buy and sell are dangerous. It’s one of the reasons it’s so important to work with real financial advisors. You can rely on your advisor to help keep those impulses under control.

Yes, the Market Can Be Scary

Back in the spring of 2009, my clients were very worried indeed. Three of them came in together to see me one day. Like most of us, they were scared to death. The market had plunged, and they’d sustained significant losses.

The conversation quickly turned to how scary the stock market was.

Them:    Hey, Carl, we think it’s time to sell.

Me:    Are you suggesting that we sell something simply because it’s down 30 percent?

Them:    Well…you know…are we just going to keep sitting here while this thing goes down?

Me:    The damage has been done, guys. You may feel like selling, but does it make any sense to sell now?

Them:    It’s scary!

Me:    It’s okay to be scared, but it’s a bad idea to act on your fear.

Them:    But this is just too painful! If things continue at this rate, we’ll have no money by the end of the year!

Me:    Actually, stocks were a lot riskier when they were more expensive. But back then, you were happy to hold them. Why sell now?

Them:    So, what do we do instead?

My answer to that one was pretty simple. I told them we should do absolutely nothing. Instead, we’d wait for things to calm down a bit and then review their plans to make sure they still made sense.

Fast-forward a couple of years. The same three guys come to see me again. Stocks had rebounded sharply, and we had a very different conversation.

Them:    ​​​​Should we move more of our cash into stocks?

Me:    Uh, why?

Them:    Because the market’s done so well lately!

Me:    You mean you want to buy more stocks because stocks are more expensive?

Them:    Well, they might keep going up!

Me:    We have no idea what the market will do in the future. Why don’t we stick with our plan?

I have these conversations all the time. In early 2011, with gold up 80 percent over two-plus years, everyone wanted to know if they should be buying it. For a while, that was the most common question I got.

I answered that gold was now riskier than it had been in a very long time. If it wasn’t already part of their plan, why add it now?

We Need to Think Years, Not Days

About five years ago, I decided to totally ignore the stock market, especially breaking news about the stock market. I didn’t stopped investing, but since investing is meant to be done over decades, I had this crazy idea that maybe I would really, truly act out that whole long-term thing. That meant thinking about five years, 10 years, even 20 years from now. But I most definitely wouldn’t be thinking about what happened in one week, let alone one day.

So, I made sure I had a diversified portfolio of investments. And then, I proceeded to do nothing. I also ignored the stock market news entirely, which has been surprisingly easy.

I hadn’t thought about this strategy for a while until a friend texted me early on a Friday morning:

“Will you come talk to my co-workers?! They are talking about stopping their 401(k) contributions because of what’s going on! Driving me nuts!”

Still not quite awake, I replied, “What?”

Within seconds, he replied, “Stock market fell 500 points this morning, Carl! It’s all the way down to 17,537!”

My first thought: “Wow! The Dow is over 17,000.” And this is where things got a bit exciting for me as a financial professional. For the first time in five years, it registered: The Dow had gone from just under 12,000 to over 17,000. That’s a gain of almost 50 percent over the last five years. Now that’s what I call amazing!

Less amazing, however, is what the markets will do, or not do, over the next few days. So, it’s time to choose: five days or five years? Trust me. Your conversations (and your returns) will improve significantly if you choose the latter.

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