Investors do not always make sound investment decisions. Human emotions unwittingly cause investors to fail through self-destructive behaviors. These negative behavior patterns often interfere with achieving optimal returns. We call these suboptimal returns the behavior gap. The "behavior gap" is a term coined by Carl Richards and has become a popular way to refer to the loss of investor returns due to emotional decisions.
Sticking to the sage discipline of an intelligent, logical, and evidence-based plan can mitigate the risk of making faulty decisions. Investors can reduce the emotional decision-making mistakes that cause the behavior gap by adopting the optimal investment structure which will either eliminate or substantially reduce the number of decisions required to be made by the investor. Investors can delegate decisions by giving investment decision-making authority to two complementary types of discretionary investment professionals:
- Investment Managers: Investors can delegate the decisions related to the purchase and sale of individual securities by utilizing professionally-managed funds such as index funds, mutual funds, exchange-traded funds (ETFs) and separately managed accounts.
- Investment Management Consultants: Investors can delegate the decisions related to rebalancing a portfolio by asset class to an investment management consultant.
Responsible investors make a smart decision to delegate the investment decision-making authority to professional investment advisors.