Secure Retirement: Connecting Financial Theory and Human Behavior
By Jacques Lussier
Investors fear return uncertainty and drawdowns associated with owning relatively risky asset classes, such as equity. The fact that greater risk is associated with greater expected return does not preclude the possibility that realized returns may be far less than a low-risk asset could provide, even with horizons as long as 5 to 10 years. Fear prompts the average investor to sometimes act against his own best interest. Therefore, the average investor’s portfolio often underperforms a static benchmark, even before fees. The average investor tends to increase allocation to riskier assets after the market has already significantly risen and decrease allocation after a significant decline.
Source: SSRN
