Why temperament matters more than intelligence in investing
Lately the headlines have gotten louder.
- War in the Middle East.
- Oil prices spiking toward $100 per barrel.
- Questions about whether AI spending has gotten ahead of itself.
- Concerns about parts of the technology sector that may have run too far, too fast.
Some of these risks are real. Some will fade with time.
But in the moment, headlines like these have a way of making the future feel more uncertain than it really is. If you’ve invested through a few market cycles, you’ve seen this pattern before.
Every year brings a new reason to worry.
The Behavior Gap
One of the most consistent findings in investment research is something called the behavior gap.
Investors tend to add money after strong performance and pull money out during periods of fear. Over time, those emotional decisions create a gap between investment returns and investor returns.
Mind The Gap
Morningstar has studied the gap between “investor” and “investment” returns for years in their “Mind the Gap” report. Their research compares the returns U.S. Mutual Funds and Exchange Traded Fund investments produce with the returns investors actually experience.
The difference often comes down to timing.
Morningstar estimates that this gap has historically cost investors roughly 1.2% per year.1
Putting numbers to this data paints quite the picture. A $1,000,000 portfolio would have grown to $1,967,151 (7%/year “Investor” return) compared with $2,199,239 (8.2%/year “Investment” return) over the trailing 10 year period. That’s a difference of $232,088.
Over an even longer timeframe, that difference can become significantly larger.
Advisors Are Human Too
There’s an uncomfortable truth that doesn’t get discussed very often.
Advisors are human too.
We see the same headlines. We feel the same uncertainty. The difference isn’t that good advisors lack emotion. It’s that they operate within a disciplined process designed to prevent emotion from driving decisions.
In fact, research in behavioral finance has shown that professionals can fall into the same traps as everyone else - overconfidence, reacting to short-term news, or trading too frequently.
Which raises an important question. If everyone feels pressure when markets get uncomfortable, what actually separates a good advisor from an average one?
Temperament
In my experience, the difference isn’t intelligence. It’s temperament.
Successful long-term investing rarely comes from predicting every market move correctly. It comes from maintaining discipline when uncertainty rises and emotions run high. That means relying on a repeatable process rather than reacting to headlines. It means evaluating data rather than responding to fear.
And it means accepting something many investors find uncomfortable: markets will always have periods that test patience. This one is no different.
This Is Part of the Process
Every year brings a new reason to worry.
- Sometimes it’s inflation.
- Sometimes it’s geopolitics.
- Sometimes it’s interest rates, technology bubbles, or recession fears.
The headlines change. The emotional cycle doesn’t.
Periods of uncertainty are not a flaw in the market system. In many ways they are a feature. Risk and reward travel together, and the moments when markets feel the most uncomfortable are often the moments that test long-term discipline the most.
That doesn’t make those periods pleasant. But it does make them normal.
Why Process Matters
Our approach is grounded in a disciplined, data-driven process.
We’ve been through many market cycles over the years, and while each one has its own story, the underlying principles remain the same.
- Stay diversified.
- Avoid emotional decisions.
- Adjust portfolios thoughtfully when the data supports it.
Clients rarely ask how their advisor invests personally, but in our case the answer is straightforward - we invest alongside you using the same principles.
Because the discipline required for long-term investing applies to everyone. Advisors included.
Perspective
The headlines may continue for a while. They usually do.
Markets could become more volatile from here. That’s always possible. But periods like this are not unusual, and they are certainly not new.
Investing has always required patience during uncomfortable moments. That’s part of the journey. And it’s exactly why discipline matters.
Please reach out if you’d like to review your portfolio or financial plan.
Happy planning,
Brian
- Source: Morningstar, 10 Year Period Ending 12/31/2024
https://www.morningstar.com/funds/investors-still-need-mind-gap-their-funds-returns