Investment returns vs. investor returns

The investor has to understand the meaning of these two terms to get a better grasp of their investment situation.

Aug 19, 2018 01:08 IST India Infoline News Service

Any financial investment can be said to give two kinds of returns: investment returns and investor returns. At first, they may seem more or less similar, however, they are quite different. So, the investor has to understand the meaning of these two terms to get a better grasp of their investment situation.

What are investment returns?

The investment return or Return on Investment (RoI) is a scale that measures the returns on a portfolio over a period of time. The investment return value tells the investor whether their portfolio has been grossing returns more than the investment cost. Investment returns calculate the overall value of the fund.

What are investor returns?

Investor return is the value of the total purchases minus the total sales of the investor’s portfolio. Investor return also measures that how an average investor has fared in the markets. It is similar to the internal rate of return ratio (IRR).

Investment returns vs. investor returns

Most often, investor returns are quite low compared to investment returns because of what Carl Richards, a certified financial planner and a best-selling author, calls “Behavior Gap.”  Many investors do not stay invested for longer periods in an asset, thus, leading to fewer returns.
Below listed are some of the factors that detail the reasons why investment return is higher than investor return.
  1. Insufficient knowledge and wrong decisions
Usually, an individual or retail investor will look for information on trending stocks and seek recommendations from friends or relatives. The investor will use these tips to buy the stocks, and in practice, this habit can be detrimental to the investor’s financial journey. The investor has to understand the stock market, the factors that contribute to the stock’s position in the market and make an investment plan before choosing the stock. A better understanding of these factors helps in choosing a stock that can give consistent returns in the long run.
  1. Duration of investment
If the investor wants profitable returns on their investment, they have to invest. not trade. Staying invested for a longer period of time can result in profitable returns. Unfortunately, the investor panics when there is a shift in the market and sells their holding, thus resulting in a loss. Market correction happens often. The key to raising investor returns is to stay invested and not to sell the assets in a hurry.
  1. Involvement of emotions
Many investors get emotionally attached to their investments, which leads to poor decision-making Some investors also exhibit overconfidence in purchasing stocks and do not consider decisive factors only to end up losing their investment.
  1. Following the herd
Many investors follow a person who has made it big in the stock market through their trading skills. If some big investor is selling his stock, the retail investor also follows suit. This behavior is wrong and will lead to lesser or no returns. Mirroring another investor’s portfolio does not guarantee high returns. Every individual has their own financial resources and commitments based on which their portfolio should be structured.

Here are some tips that can increase investor returns:
  1. The investor should have an investment strategy according to their financial status and risk appetite.
  2. If unable to devise an investment strategy, it is prudent to seek advice from an experienced financial advisor.
  3. An investor should develop investing discipline and be free of emotions when managing their portfolio.
  4. Regular evaluation of the investment portfolio as per the changes in the financial status or economic conditions.
  5. The investor should not panic when the market is volatile, as market correction happens often.
  6. An investor can seek the advice of an expert but, at the same time, carry out their research.
To gain more returns from the market, an investor has to stay invested and take prudent decisions that give them consistent returns. Investing in securities that have higher investment returns can assist in gaining higher investor returns. 

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