Avoiding the Negative Return Gap

Writing in the Wall Street Journal, former Morningstar analyst John Coumarianos highlights “investors’ self-defeating behavior” and suggests ways to correct it. He notes that Morningstar data shows a “negative ‘return gap’” of 1.8% over the past decade, and 1.6% over the past 15 years, “because of bad trading.” The return gap is the difference between a fund’s total return (which accurately measures a manager’s performance) and an “investor return” (also called “a dollar-weighted return”), which “evaluates how much of the fund’s return the average dollar invested in the fund has extracted” and thus “how well or poorly investors trade their […]

How Market Surprises can Impact your Thinking

Jason Zweig of the Wall Street Journal highlights the effects of surprises on investor psychology, drawing on neuroscience and historical events back to the 18th century. Robert Shiller of Yale says, “Metaphors and stories are important in investors’ thinking, and they can become a self-fulfilling prophecy,” noting that such stories are adjusted partly “by the almost instinctive urge to look at others’ emotions.” The journal notes that “all investors have a narrative in their head . . . the simpler that story is, the more likely you are to feel in control and the more confident you will be that […]