The Curse of the Behavior Gap

John Noonan Uncategorized

Market timing does not work. Most of us want it to work. It’s quite appealing to think that we could be invested when things are good and get out when things are bad. If only.

If you’ve been with us long enough, you’ve heard us say over and over – or perhaps ad nauseum! – that only patience and discipline will win the day. Like anything we try to teach about investing, it’s rooted in science and data. Here’s some that demonstrates why market timing does not work:

Great Oak Capital Partners - 2023.10a

This graph from Morningstar shows the difference between the return that mutual funds have offered us and the return that we as investors have realized – the “behavior gap”. In other words, take a fund, any fund, and look at its return over the last ten years. Maybe it says 8.50%. That would be the return you would have received if you invested in the fund and stuck with it through the whole ten years. But most people tend to not stick with things. And most people tend to chase the hot fund or stock. Those two tendencies, on average, cost us about 1.68%. So that 8.50% gets whittled down to 6.82%. Morningstar summed it up perfectly: “…inopportunely timed purchases and sales cost investors about 22% of the return they otherwise could have earned had they bought and held.”

In times like these, when it feels like every rally is taken right back, when too many good monthly statements are followed by bad ones, we are tempted to do anything that just might give us an edge. Shake things up, you might say. But you must resist that temptation. Your investing success depends on it.

Twenty-two months of no new highs is tough. It can hurt, and we feel your pain. We are right there with you. So lean on us. Talk to us. Ask every question you have. It’s a marathon, not a sprint. And we’ll be here for you every step of the way.

“The big money is not in the buying and selling … but in the waiting.” -Charlie Munger


Your Great Oak Team