Help Take the Emotion Out of Investing | American Funds

Client Conversations


Controlling Emotion Can Be Critical to Investor Success

Fear of loss is a common emotion among investors, driving many to buy and sell investments at the wrong time. You can help clients manage their emotions in order to achieve some peace of mind during volatile times.

People, in general, get emotional about money — especially the possibility of losing it. According to Nobel Prize-winning psychologist Daniel Kahneman, for most people, the fear of losing $100 is more intense than the prospect of gaining $150.

Risk-aversion can have its cost. And it’s not just missed opportunity.

Too often, emotion sparks irrational behavior, such as cashing out, chasing returns and jumping from fund to fund — essentially buying high and selling low, and locking in losses.


Findings That You Can Share

This may be a major contributor to recent findings by Morningstar®, Inc., which compared mutual fund returns with the gains investors actually received and found that investor returns typically lagged fund returns.1

The study covered 10 years through the end of 2016 and found that funds posted an average annualized return of 4.33%, compared with a 3.96% average return realized by investors. (Those totals factor in all stock and bond funds that Morningstar tracks. Investor returns are weighted based on asset flows into and out of all share classes of open-end mutual funds tracked by Morningstar.)

Although a gap of almost half a percentage point may not seem like a big difference, it can make a significant impact over the long term, thanks to compounding. In fact, a $10,000 investment returning an average of 4.33% annually would produce a total of $15,279 over 10 years, compared with $14,746 for an average annual return of 3.96% over the same period. Over 30 years, the gap becomes even wider: $35,668 for the 4.33% return vs. $32,062 for the 3.96% return.2

Another study, by Dalbar, Inc., noted an even bigger gap with average equity investor returns lagging those of the S&P 500 by 3.66%.3(Dalbar used data from the Investment Company Institute, Standard & Poor’s, Barclays Capital index products and proprietary sources to compare mutual fund investor behavior with an appropriate set of benchmarks. These behaviors were then used to simulate those of the “average investor.”)


Take the Emotion Out of Investing and Focus on Long-Term Goals

A key to controlling behavior is understanding the emotion behind it. The knowledge and perspective you bring to the table can prove invaluable to clients who are overcome by fear. 

Talking points you can use:

  • Start a dialogue with your clients. Explain that:
    • It’s natural to feel worried. Even people who are aware of the market’s historical cycles may feel torn between emotions and knowledge.
    • If it helps, you can highlight market volatility and opportunity by sharing with your clients pages 8-13 of The ICA Guide (PDF): The ICA Guide | Quarterly Statistical Update.
  • Suggest clients sleep on major decisions before taking action.
    • A 24- to 48-hour window of reflection may help them avoid making short-term decisions during volatile markets that may negatively affect the value of their portfolios.
    • A regular investing strategy (based on process, not emotion) can help investors focus on their long-term goals, rather than short-term market fluctuations.
  • Help build diversified portfolios that are spread among different asset classes, sectors and countries.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 


Source: Russel Kinnel, Mind the Gap 2017, Morningstar, May 30, 2017


Hypothetical results are for illustrative purposes only and in no way represent the actual results of a specific investment.


Source: Dalbar, Inc., Quantitative Analysis of Investor Behavior, 2016

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.

©2018 Morningstar, Inc. All Rights Reserved. Some of the information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar, its content providers nor the American Funds are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Information is calculated by Morningstar. Due to differing calculation methods, the figures shown here may differ from those calculated by American Funds.