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Aug 05

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Applying investment rules increase returns and satisfaction

Behavioral economics and finance use social and emotional factors to understand the limits of rationality in making economic decisions. A recent survey by Barclays addressed techniques used by wealthy investors to increase both investment returns and their personal satisfaction. The survey covered over 2,000 high net worth individuals across the world, all of whom had at least £1 million of investable assets, including over 200 who had over £10 million of investable assets. The survey also interviewed numerous academics, entrepreneurs and other experts about the meaning and reasons for the results.

The study asked about techniques used by these affluent persons to overcome behavioral economic challenges. Each of the following mechanical decision-making strategies were used by at least 70% of the surveyed affluent individuals:

  1. Purposefully limiting investment options to avoid possible mistakes
  2. Avoiding persons and situations in which one is tempted to invest in items that one is likely to later regret
  3. Use of investment rules
  4. Setting deadlines for oneself to avoid procrastination
  5. Use of a cooling-off period to rethink tentative decisions
  6. Delegating decisions to others, such as investment advisors

The use of rules was correlated with both higher wealth, and higher satisfaction. The ability to control one’s emotions using rules such as these has a big impact on the investment returns one achieves. According to the study:

One key reason why individual investors systematically underperform professional investors is not that they’re inherently worse investors, but simply that professional investors are aided by a strong set of institutional rules that ensure greater control of their knee-jerk reactions. …

Whilst many high net worth individuals in this study are able to identify that financial strategies are effective, another of our key findings is that for particular personality types, these strategies are associated with increased financial satisfaction. Not only do strategies bring this hidden emotional benefit, but our study also found these strategies were associated with higher wealth levels. …

This lack of control over our emotions is not an abstract problem; in fact, it can have tangible, detrimental effects on both investor satisfaction and performance. A recent Dalbar study into investor behavior found that over 20 years, ending December 31, 2010, the average equity investor earned 3.8% a year, while the S&P 500 index returned 9.1% annually — a considerable difference. This effect was also found in a study commissioned by Barclays Wealth at the Cass Business School from 1992 to 2009, though the results were more conservative. The total return of UK equity funds was 6.5% but the average investor earned only 5.3%. Compounded over 10 years, this difference is significant – it is a sacrifice of nearly 20% of one’s return.”

Additional results from this study are described in this article.

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2011/08/applying-investment-rules-increase-returns-and-satisfaction/

3 comments

  1. Debrah Eadie

    I enjoy your history, let me save this site and come back here in next few days.

  2. Блог о путешествиях

    Thx for this great information that you are sharing with us!!!

  3. lexapro

    Great post I must say. Simple but yet interesting and engaging. Keep up a good work!

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