Posted by Brittany Landry on August 20, 2018
When it comes to our portfolios, the word “return” is one that most of us understand and recognize. However, focusing on (or chasing) returns can be a futile exercise.
A recent Wall Street Journal article highlighted the ‘Return Gap.’ Often, retail investors do not fully experience a mutual fund’s stated return. Why? Because retail investors tend to buy more when a fund is going up and sell off when a fund is headed down. As they seek a good return, they do not want to miss out when a market is climbing, so they tend to buy high. Same can be said when a market is heading south; investors sell to avoid further loss. The difference in returns for a retail investor and a fund’s stated return (if the shares were held through up and down markets) is referred to as the “return gap. “
According to the article, the return gap for a Retail investor is between 1% and 2% per year. Retail investors miss out the most when it comes to leaving money behind. Index or passive investors would mirror stated returns because the basis of their investment is to be hands off. Impact and Sustainable investors are driven by their ethics and not by returns. As a result, their return gap is minimized. The last class studied was Institutional investors, who do more than half a percent better than retail investors.
The point is to avoid chasing return - because chasing return will lead you to leave a good part of your potential return on the table.