History shows that mutual fund investors generally increase inflows after observing periods of strong performance. They buy at high prices when future expected returns are lower, and they sell after observing periods of poor performance when future expected returns are now higher.
This results in what author Carl Richards called the “behavior gap,” in which investor returns are well below the returns of the funds in which they invest. Perhaps with this observation in mind, Warren Buffett once said, “The most important quality for an investor is temperament, not intellect.”
In his wonderful book “The Behavior Gap,” Richards recommends asking three questions before you make investment decisions based on your own or someone else’s forecast: Continue reading “The Behaviour Gap – Mutual Funds”