Your Investment Results are Driven by Your Behavior

Your Investment Results are Driven by Your Behavior

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Author: Jeremy K. Kuhlen, CFP®, CRPS®, AIF® Managing Director
Private Client Practice
CapGroup Advisors, LLC

Just as driving up a winding road while looking at the rear view mirror is treacherous, so is investing in 2014 by looking at what happened in 2013. Too many investors will fall into the performance chasing syndrome for fear of missing out because they feel their portfolio didn’t perform in 2013 as well as the market.

What typically occurs is that investors will reallocate their money to the best performing asset class or manager based on last year’s results. It defies the investment mantra of buy low and sell high, and in reality investors will buy high and sell low; a recipe that has come to be known as the investor “Behavior Gap.”1 The behavior gap has been quantified in the annual QAIB study from Dalbar and the results are staggering – the average stock fund investor has underperformed the S&P 500 by nearly 4% annually for the twenty year period ending December 31, 2012.2

The takeaway is clear: investment results are often more dependent on investor behavior than on fund performance.

3 Issues to Consider for 2014

Before you fall prey to your emotions and experience the behavior gap, get a professional’s second opinion. Here are three specific portfolio issues that need attention as we begin 2014.

Issue #1: Owning too much in U.S. Stocks

When we look at global market capitalization the U.S. represents less than 50%. However, many U.S. investors have 80-100% of their stock exposure to just U.S. companies. They are failing to benefit from global diversification. If the stock portion of a portfolio is not split between U.S. and international then you need to have a good reason.

Issue #2: Dependence on Traditional “Conservative” Bonds

Last year traditional bonds experienced negative returns as reflected by declines of more than 2% for the Barclays U.S. Aggregate Bond and Municipal Bond indexes. The forecast for 2014 is not much better. When interest rates rise in the future, traditional bonds will continue to face pressure. A broadly diversified, multi-strategy bond approach can help weather the storm as investors still need the diversification of bonds, but they must use smarter vehicles to find total return.

Issue #3: Lack of Alternative Strategies

With lower return expectations for traditional stock and bond strategies in the future, investors need to include alternative strategies to potentially increase their returns, improve diversification, and reduce the volatility of their portfolios. To provide an example of institutional usage, many large endowments allocate between 10-60% of their portfolio to alternative strategies.3

Get a Second Opinion

As the global economy continues to evolve, building a portfolio for the long haul seems overwhelming for most investors. The choice of how to allocate a portfolio between stocks, bonds, alternatives, and cash is just the tip of the iceberg. To then sort through all the investment options to fill those different buckets is almost paralyzing. As we stated earlier, your behavior drives the end result. The first step is to take the time to consider the big picture and put things in their proper perspective, and that is what a second opinion can do for you.

Questions? We can help you to make smart financial decisions that will serve you and your family. Please contact your Keiter team at 804.747.0000 or to schedule a time to talk.

1. Carl Richards, Behavior Gap © 2014,




This document is not to be construed as an offer to buy or sell securities. Please remember that past performance may not be indicative of future results. The material presented is for general illustration and information purposes only. The information herein was prepared using sources that the firm believes are reliable and cited in the footnotes, but the firm does not guarantee that such information is free from errors, omissions, whether human or mechanical, nor do we guarantee their timeliness, accuracy, or completeness. Due to various factors, including changing tax, market and regulatory conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this memorandum serves as the receipt of, or as a substitute for, personalized investment advice from CapGroup Advisors.

About the Author

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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