Article 5

Understanding Financial Potential

What does it mean to compare your current self in terms of wealth to your financial potential? One critical approach is to measure the return that an investment delivers versus the share of the return that you, as an investor, actually realize. We refer to the former as the investment return and to the latter as the investor return. These two can diverge significantly, often to the investor's disadvantage, with the difference typically widening over time. This gap between investment and investor return is known as the investor gap - a space where opportunities are lost, and financial freedom is compromised.

Our core motivation at Caplign Wealth is to empower our clients to harvest investment returns in full by closing the investor gap. When this is achieved, financial potential is realized.

Often, this missing slice of performance that enhances your financial success is difficult to identify. In the worst cases, it remains unnoticed entirely. What is not observed is unlikely to be addressed. The reasons behind the investor gap are numerous, but before delving into them, we’ll illustrate the gap’s astounding cost.

The Cost of the Investor Gap

The cost of the investor gap is estimated at a stunning 200- 300 basis points.

This may not sound like a lot to you, and in nominal terms it is true that the additional return earned is comparably small when the lookback is short, say one year. But it is a lot when such difference is repeated year after year after year. When taking the long view and allowing for some perspective over a multiple year horizon, you’ll quickly see how powerful a steady - or even intermittent - additional 250 basis point return can become.

Consider this example: your starting portfolio of EUR 5 million generated 6% p.a. over a 10-year investment horizon. Its final value is approximately EUR 8.95 million. The power of compounding turns an annual gain of EUR 300.000 into a 10-year gain of just under EUR 4 million. It’s not surprising then that small changes in the growth rate of capital can have a meaningful impact when the long view is taken. Earning 8.5% instead of 6% p.a. over a time period of 10 years means increasing the amount in your pocket by roughly EUR 2.5million! A return of just under 9 million turns into one of just under 11.5 million when earning 8.5% instead of 6% per year over a time period of 10 years.

What this simple example is showing is that the compound euro difference owed to the investor gap is substantial and can erode your financial potential significantly, leaving a lot of money on the table. In other words, compounding compounds.

The graph below illustrates how a small investor gap year by year turns into a meaningful disadvantage over longer time horizons.

What if we told you that closing the investor gap doesn’t require exceptional investment skills, a crystal ball, or the latest, most expensive products? That’s precisely what we’re here to tell you. Let’s explore together how to bridge the gap.

Why Does the Investor Gap exist?

The investor gap exists primarily due to two factors: investments are not aligned with personal goals and decisions are made based on emotions and behavioural biases.

Goal Alignment: Your financial goals are the foundation of a successful investment strategy. For one, your investment journey becomes more purposeful when clearly directed towards achieving a number of objectives and fulfilling a broader “Why”. It also means that you’re less likely to become distracted by product advertisements following the latest investment themes (which have often played out by the time they reach banks’ platform offering) or are driven by short-term financial news. Ultimately, having clear goals that you identify with and narrowing in on achieving those means that you are more likely to stick with the investment strategy defined to meet those goals.

Behavioral Discipline: As Morgan Housel aptly states, "personal finance is more personal than finance." And because money is so personal, we are prone to allow emotional biases to impact our investment decisions. Yet emotions are not a wise investment advisor, leading for instance to poor timing decisions, and turning the old adage of buying low and selling high on its head. Through comprehensive, science-based behavioural assessments, we help you to understand and navigate your financial behaviour, mitigating the influence of fear and greed. By maintaining discipline, even during market volatility, you can stay the course and hone in on the returns the market has on offer.

Aligned goals and behavioural discipline are key ingredients to bridging the gap between investment and investor return. They ultimately translate into an investment strategy that you are able to stick with and that is executed with persistency. That in turn translates into taking advantage of the most powerful force there is in finance, the power of compounding, where even small variations can make a large difference over time. When investments compound effectively, substantial long-term wealth accumulation is on the horizon.

A Case for Strategic Wealth Management

At Caplign Wealth, we believe that a successful long-term investment strategy starts with analysing your existing portfolio(s) towards their fit-for-purpose status. Illuminating their strengths and weaknesses, as well as alignment with your goals allows us to identify the gap. Based on your unique life goals and financial personality, we will then construct a strategic wealth strategy that maximizes the chances of reaching your financial potential. Implementing your strategy with cost effective instruments and throughout a tight investment process, as well as behavioural coaching along the investment journey will further ensure that the investment return equals the investor return.
What ultimately matters is not just outperforming a market-based benchmark. While we aim to generate consistent alpha beyond broad market returns, this is merely the cherry on top. The most significant and rewarding factor is realizing one's financial potential, thereby unlocking greater freedom of choice and independence.
At Caplign, we are committed to guiding you on this journey, helping you turn the missing performance puzzle pieces into a complete picture of financial fulfillment.