The Difference Between Investment Return and Investor Return

Investing is a key component of your financial plan. To be successful, one of the most important traits you need is intestinal fortitude. Reaching for return introduces some emotional stress, and sometimes that stress can be intense. Big decreases in value cause many people to sell investments – and most do it when they shouldn’t.

Investment return and investor return are two terms that are often used interchangeably, but they have distinct meanings in the world of finance. Understanding the difference between the two can help you make better investment decisions and improve your overall financial outcomes.

Defining Investment Return and Investor Return

Investment return refers to the gain or loss on an investment, usually expressed as a percentage. It represents the financial performance of an investment over a certain period of time. It takes into account factors such as capital gains, dividends, and interest.

On the other hand, investor return is the actual return experienced by an individual investor. It takes into account not only the financial performance of the investment itself but also the timing and frequency of the investor's contributions and withdrawals.

Often There is a Difference

In theory, investment return and investor return should be the same. However, in reality, there is often a significant difference between the two. This is because most investors do not make consistent contributions and withdrawals, and their timing can have a substantial impact on their overall returns.

For example, if an investor invests a large sum of money right before a market downturn and then withdraws it during a market upswing, their investor return will be much lower than the investment return.

Why The Difference?

There are several reasons why the difference between investment return and investor return exists:

1. Volatility and Emotional Decision Making: Investing involves risk, and market volatility can cause emotional stress. Many investors make impulsive decisions based on their emotions, leading to poor timing of contributions and withdrawals.
2. Lack of Financial Plan: A significant number of individual investors do not have a well-defined financial plan. Without a plan, it is difficult to make informed decisions and stick to a long-term investment strategy.
3. Media Influence: The media plays a significant role in shaping investor behavior. Investors often make decisions based on news headlines or market predictions, which can lead to irrational investment choices.
4. Reluctance to Seek Professional Advice: Professional financial advice can be costly, and some individuals prefer to manage their investments on their own. However, this DIY approach can lead to suboptimal investment decisions.

Successful Investing is 90% Mental

Successful investing is primarily a mental game. It requires discipline, patience, and a long-term perspective. Emotions can lead to mistakes and cause investors to deviate from their investment plan.

Investors need to develop a strong mindset and focus on the long-term goals rather than short-term market fluctuations. This mental fortitude can help investors stay the course and avoid making impulsive decisions based on fear or greed.

Conclusion

Investment return and investor return may sound similar, but they have different meanings and implications. Understanding the difference between the two can help investors make better investment decisions and improve their overall financial outcomes. Successful investing requires a combination of knowledge, discipline, and emotional resilience. By staying focused on long-term goals and avoiding emotional decision-making, investors can enhance their chances of achieving their financial objectives.