Being human costs money – Barclays Wealth survey

A White Paper from Barclays Wealth & Investment Management on behavioural finance has found that what may be seen as rational behaviour by individual investors against the theoretical best practice for, say, asset allocation, is costing them 2%-3% annually in return.

This is because investors, as human beings, find it hard to balance what may be optimal long term decisions against different decisions that are made in the short term to reduce anxiety.

The conclusion is based on over half a decade of implementing a process to identify investor behaviour and the types of situations and decisions that they feel increase or decrease anxiety in the short term.

Greg Davies, head of Behavioural Finance at Barclays Wealth & Investment Management, said studies into behavioural finance suggested that while the industry looked at risk/reward ratios, for individual investors it was more a case of anxiety/reward.

This is something that provider firms also need to think about, as providing the right answer to a rational but theoretical person is not enough – firms have to get a better understanding of what level of return investors are comfortable with in mind of what levels of anxiety over their finances they are prepared to tolerate.
Businesses such as Barclays Wealth & Investment Management can benefit from understanding how clients enter into a “zone of anxiety” during which they may make significant financial decisions.

Davies said that it was “rational to want to feel comfortable” during the investment journey, even if this ended up affecting the return gained over the longer term.

Identifying the so-called behaviour gap – the difference between actual investor returns and what they might have got if they stuck to classic investment principles – is important because over a longer period it can have a significant affect on the growth of portfolios, even if they are well diversified among asset classes.

Click here to read the full report: [asset_library_tag 6606,White Paper – Behavioural Finance]

 

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