Financial Potential: The Investor Gap

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 case, 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 2-4 % per annum^1,2.

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 3% return can become.

Consider this example: your starting portfolio of EUR 5 million generated 3% p.a. over a 15-year investment horizon. Its final value is approximately EUR 7.8 million. Turn a 3% return p.a. into a 6% return p.a. through closing the investor gap, and the same starting point of EUR 5 million turns into just under EUR 12 million. The power of compounding takes the return difference of 3ppts in year one from EUR 150 thousand (EUR 300 thousand - EUR 150 thousand) into a return difference of nearly EUR 4.2 million by the end of year 15.

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

The illustrations that follow show a real world example, where the investor gap is even larger than in our conservative hypothetical case.

The first chart³ depicts 20-years of annualized returns by asset class and includes the average investor’s return. Comparing to what is probably amongst the most common reference portfolios for the average investor - a 60/40 portfolio consisting of global equities and bonds – has returned 7.4% on average over the past 20 years. That is more than 3ppts above the average investor’s realized return over the same time period.

Continuing with our investment horizon of 15 years, this difference in annual returns implies that our starting value increases by 1.5x when the average investor return is realized, but nearly triples when market returns are realized. The below graph⁴ illustrates this stunning gap.

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 Tim Maurer aptly states, "personal finance is more personal than finance."⁵ 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 Wealth, we are committed to guiding you on this journey, helping you turn the missing performance puzzle pieces into a complete picture of financial fulfilment.

1. Investment Advisory Research Center, Putting a value on your value: Quantifying Vanguard AVanguarddvisory Alpha, July 2022
2. J.P.Morgan Asset Management, Guide to the Markets, Market Insights, Q2 2022, as of May 6, 2022. DL SLides_Fishers_13May2022.pdf (financialplanningassociation.org)
3. J.P.Morgan Asset Management, Guide to the Markets, Market Insights, Q2 2022, as of May 6, 2022. DL SLides_Fishers_13May2022.pdf (financialplanningassociation.org)
4. Caplign Wealth, own calculations, September 2024.
5. Maurer, Tim. “Tim Maurer on Why Personal Finance is More Personal Than Finance.”  Advisor Innovations Podcast. May 25, 2023. Podcast, 34:26.