The Primacy of Behavior in Real-World Investment Success

Investor behavior – not performance – drives the financial outcomes experienced by most investors

Timothy J. Keating //December 12, 2018//

The Primacy of Behavior in Real-World Investment Success

Investor behavior – not performance – drives the financial outcomes experienced by most investors

Timothy J. Keating //December 12, 2018//

There is a story about Hillel, who lived in the first century B.C. and is widely regarded as one of the greatest Jewish thinkers of all time. According to lore, he was approached one day and asked if he could explain the Torah while standing on one leg. Hillel replied, “That which is hateful to you, do not do to another. This is the whole of Torah. Everything else is commentary.”

The principle of simplification requires any big idea one wishes to impart must be communicated very simply, such that it has an unmistakably clear essence. 

In real-world lifetime investment success, defined properly as the achievement of one’s financial goals, there are three determinants that truly matter: financial planning, asset allocation and behavior. Everything else is commentary.


Just as an airplane requires a flight plan to safely reach its destination, affluent families need comprehensive, date- and dollar-specific financial plans to successfully complete their multi-decade or transgenerational financial journeys. Although financial planning is relatively simple in concept, the execution can often be confusing.

The average individual has no interest in wading through a dense, jargon-filled, 50+ page financial plan packed with thousands of numbers. Rightly so. The plea when faced with such a behemoth is something like: “Just tell me exactly what to do, and I will do it. That’s why I’m paying you.”

But Wall Street’s compliance gargoyles have taken over the cathedral, and large firms in particular are especially guilty of rendering advice laden with qualifying, wishy-washy, it-depends recommendations that leave the recipient uncertain.

So what does excellent, elegantly simple, actionable financial advice look like? 

As one example, consider the tables below, which quantify precise monthly savings goals for college.

There is one table for public college and one for private college. Each shows the total four-year cost based on the child’s current age and the required monthly contribution based on the percentage that will be contributed by the parents.

Does it matter to the saver that college costs are estimated to inflate at 5 percent per year, that these examples assume investment returns of 6 percent compounded monthly, or that the average time to complete a bachelor's degree is now 5.1 years? 

Of course not; this is commentary. The saver knows the required action and monthly amount.


Since we've written about this extensively in the past, we now invoke the spirit of Hillel and sum up everything you need to know about the subject of asset allocation while standing on one leg.

In addition to having a cash reserve fund sufficient to cover one or two years’ worth of living expenses, we advocate investing funds to cover foreseeable capital needs over the next five years in Treasurys or investment grade bonds with a corresponding maturity – or an equivalent bond fund. Investing the remainder of the portfolio in equities will enable you to grow your capital and cover the always-increasing costs of a typical three-decade retirement.

This advice is radically different than the typical, incomprehensible pablum spewed by many financial advisers. In contrast, our model is simple, elegant, reliable and easily actionable. But is it foolproof? For the vast majority of investors, sadly, no – but because of investor self-sabotage, not any defect in the model.


Of the three real-world determinants of an investor’s lifetime investment experience, behavior dwarfs the other two by orders of magnitude. A high-quality financial plan for a 50-year-old woman in good health will cover a time horizon of at least four but more likely five decades.  Since the software used to generate the plan already fully incorporates the volatility of every asset class in a typical simulation of 1,000 trials to determine the probability of success, the extreme fluctuation of equities is already fully baked in. No human override or tinkering is required.

Yet tinkering is precisely what happens in the real world. Stocks get pummeled or whatever the verb du jour happens to be, in reaction to the financial media’s declaration of the latest apocalypse. In response, the individual’s reptilian brain, the oldest of the three human brain parts, issues a primal “flee” instinct.

The real risk for equity investors is not volatility; it’s their emotional response to volatility. We all have an innate tendency to interpret large temporary declines in the market as the beginning of the end. And when we panic, we flee. Investor behavior – not investment performance – drives the financial outcomes experienced by most investors.

For decades, countless experts have tried and failed to predict or time the markets. To capture 100 percent of the long-term return of equities, investors must be in the market at all times. This means experiencing 100 percent of the short-term volatility.

Despite having a perfect financial plan, coupled with perfect asset allocation in a portfolio as the medium to fund the plan, incorrect behavior can completely negate the benefits of the first two. Whatever may be happening in the world, you should patiently hold the portfolio that offers you the best chance of reaching your financial goals.

In the real world, exceedingly few investors are hard-wired to set it and forget it. These outliers can tune out the financial media and avoid checking their portfolios on a daily basis. They can think in decades, not days. For everyone else, sage behavioral advice against panic selling during falling markets is typically worth multiples of any advisory fees. That’s why it’s essential to work with an adviser who will help you stick to a well-constructed financial plan.