Why did investors in allocation funds fare so much better? As the study notes, allocation includes target-date funds held almost exclusively in 401(k)s, where savers tend to invest regularly and pay little attention. That combination of disciplined investing and benign neglect also appears to have contributed to the success of investors in Australia and South Korea, which boast a positive behavior gap of 0.65% and 0.26%, respectively, due in part to broad adoption of systematic investing that keeps savings flowing to markets regularly.  

Another clue is that the gap appears to be related to the volatility of the investment. Morningstar sorted stock, bond and allocation funds into quintiles based on standard deviation, a common measure of risk. In the U.S., the behavior gap worsened across all three categories as volatility rose. For the most volatile quintile of stock funds, the gap was a whopping -1.86%. The results were generally similar around the world. The key insight is that just because an investment promises a higher return in exchange for more risk doesn’t mean investors will capture it; when humans are involved, sometimes less risk translates into a higher return.

There are some caveats around all this. One is that investors don’t always control the timing of their investments, so some of the behavior gap may be attributed to luck rather than behavior. Also, more data is needed. The numbers in the U.S. stretch back to 2005, so they include just the one bear market around the 2008 financial crisis. And outside the U.S., the numbers begin in 2010. Given the apparent link between volatility and behavior, the gaps are likely to widen during the next downturn.  
The last decade will be known for the low-fee revolution. Let’s hope the next one is equally revolutionary when it comes to changing investors’ behavior.  

This opinion piece was provided by Bloomberg News. 

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