medium · Certified Financial Planner Psychology
A planner is calculating the "behavior gap" for Michael Brennan's portfolio. The equity fund he owns returned 9.2% annually over 10 years (time-weighted), but because Michael frequently moved to cash during volatility, his actual dollar-weighted return was 7.4%.
What is the behavior gap and how should it be presented?
- 1.8%; present it as evidence of Michael's failure as an investor to motivate change
- 16.4%; present it as a cumulative loss to emphasize the danger of Michael's strategy
- 1.8%; present it as a clinical measure of the cost of timing decisions to improve future adherence
- 0.0%; because the time-weighted return is the only accurate measure of the fund's performance in this case
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