Behavior Gap: The Worst Investors 'Enemy
The reason behind the difference between market returns and actual investor returns
Behavior Gap: The Worst Investors 'Enemy
The reason behind the difference between market returns and actual investor returns
Fear and excitement drive investment decisions. Discretionary investors chase after stocks that have already soared, and when the market drops, they panic-sell. It feels like they’re making smart decisions in the moment, but time and time again, the data tells a different story.
Benjamin Graham once said, "The investor’s chief problem—and even his worst enemy—is likely to be himself." I’ve seen this play out firsthand. The difference between those who succeed and those who fail isn’t intelligence—it’s discipline. And today, I want to talk to you about why systematic investing is the key to avoiding the traps our own emotions set for us.
Great investors don’t just accumulate experience—they learn from it. And the most successful among them have one thing in common: they remove emotion from their decision-making process.
The Secret to Beating the Market: It’s Not What You Think
One of the most seasoned advisors I know, a man who has spent decades in the trenches of financial markets, once told me, "Trend following isn’t just an investment strategy. It’s a behavioral advantage." He has seen investors make the same mistakes over and over again—chasing past winners, selling in fear, and letting short-term emotions derail long-term success.
And every year, the numbers prove him right. The annual DALBAR study quantifies what we call the ‘behavior gap’—the difference between market returns and actual investor returns. And the biggest reason for that gap? Human behavior. The solution? A systematic strategy that forces discipline.
The Data Doesn’t Lie
The DALBAR study shows that individual investors consistently underperform the market, not because of poor asset selection, but because of poor timing. Selling when fear takes hold and buying after a rally has already happened creates a cycle of losses. Trend following offers a way out—by using rules, not emotions, to dictate investment decisions.
Disciplined Strategies Outperform
February’s market data tells an interesting story. The S&P 500 reached new highs before pulling back, yet despite this short-term volatility, systematic market cycle/trend-following strategies have remained steady. Instead of reacting to headlines, they follow price movements objectively, ensuring investors stay the course rather than get whipsawed by emotions.
Last week I had an interesting conversation in LinkedIn with Ronen Olshansky.
The New Role of Financial Advisors: Coaching, Not Guessing
The role of financial advisors has evolved. It’s no longer just about picking investments—it’s about helping clients avoid the mistakes they naturally want to make. Closing the behavior gap is one of the most valuable services an advisor can provide, and a market cycle/trend following strategy is an invaluable tool in that mission.
The Greatest Investing Edge? It’s Not Intelligence—It’s Discipline
I know how difficult it is to stay disciplined. I’ve had clients call me in a panic, ready to sell everything during a market downturn. I’ve seen others get swept up in euphoria, believing the rally will never end. It’s human nature to feel these emotions. But the investors who succeed? They’re the ones who stick to the system.
One of my favorite analogies is that of a pilot flying through turbulence. Imagine if every time a plane hit rough air, the pilot abandoned the controls and started making erratic movements. That would be disastrous. Instead, pilots rely on their instruments, trusting their training and staying the course. That’s what systematic investing does—it keeps us steady through the turbulence.
So, what’s the takeaway? It’s simple: remove emotion from investing and replace it with discipline.
We all want financial success, but few are willing to do what it takes to achieve it—sticking to a process, even when it’s uncomfortable. Trend following isn’t just an investment strategy—it’s a way to protect yourself from yourself. It’s a way to ensure that your wealth compounds over time, without being derailed by the impulses that can sabotage even the smartest investor.
So the next time you feel the urge to react, stop. Take a breath. And ask yourself—am I acting on emotion, or am I following a system that has stood the test of time?
Because at the end of the day, the greatest edge in investing isn’t intelligence—it’s discipline. And that discipline, if applied correctly, will lead you to the one thing every investor truly desires: long-term success.
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