In a relative sense, building and maintaining a portfolio is – with the necessary skills available -the logical, straightforward part of investing. The harder part is having the confidence and emotional fortitude to stick with the programme through thick and thin.
A good adviser will take every client through a disciplined risk assessment process which takes into account both the emotional and financial consequences of the trade-off between hoped-for returns and possible losses. They will also take time to explain the role each of the assets plays in the portfolio.
Even so, when markets – particularly stocks – are either going up or down with great magnitude, as they inevitably do from time to time, an investor’s emotions will kick in either in the form of greed or fear.
Figure 1: Greed and fear – humans are poorly wired to be good investors
Source: Albion Strategic Consulting, adapted from Tim Hale (2023), Smarter Investing: Simpler Decisions for Better Results. FT Publishing. © All rights reserved.
As human beings, we simply can’t help it. Given that investors feel the pain of losses twice as much as the pleasure of gains[1], they are most vulnerable at times of market falls. A good adviser needs to act as an emotional counter-weight at these times and reinforce in the client’s mind (engaging the logical side of their brain) that the portfolio is structured as it is for a specific reason and knee-jerk reactions should be avoided at all costs.
Empirical insights demonstrate differences exist between returns that funds achieve, and the returns achieved by the investors in the fund. Whilst to some this may seem a confusing statement, the issue is due to the timing of investor cash flows into and out of the fund.
[1] Coined ‘prospect theory’, Kahneman, D., Tversky, A. (1979). ‘Prospect Theory: An Analysis of Decision under Risk’
Figure 2: The behaviour gap
Source: Albion Strategic Consulting
It appears that fund investors are not good at market timing, resulting in achieving lower returns than the funds they invest in. This wealth destroying phenomenon has been coined ‘the behaviour gap’ by the industry and is widely observed across a range of fund sectors. Patience and discipline are surprisingly rare.
This behaviour gap is often somewhere in the region of 1% to 2% a year. Given the fee that most advisers charge as an ongoing fee, which should also include comprehensive financial planning and regular goal tracking, it is easy to see
the value of employing a steady hand to guide an investor through choppy waters.
Important notes
This is a purely educational document to discuss some general investment related issues. It does not in any way constitute investment advice or arranging investments. It is for information purposes only; any information contained within them is the opinion of the authors, which can change without notice. Past financial performance is no guarantee of future results.
Products referred to in this document
Where specific products are referred to in this document, it is solely to provide educational insight into the topic being discussed. Any analysis undertaken does not represent due diligence on or recommendation of any product under any circumstances and should not be construed as such.
Approved by Best Practice IFA Group Ltd on: 06/05/2026
