Three Factors that affect your investment returns

The three factors that will affect your investment returns are:

  1. Cost
  2. Asset Allocation
  3. Human Behaviour

Cost: If the product or fund costs you 5% per year to maintain, your returns are going to be diminished, unless you get over this figure.

Asset Allocation: If your money is sitting in cash, it will be eroded by inflation. If it is in equities, it has a good chance to grow.

Human Behaviour: Exiting the market at the bottom and getting in at the top are classic human behaviour mistakes. Stay in for the longest period you can

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Using your brain

Here are four examples of how these types of biases can affect people in the business world:

Familiarity Bias: An investor puts her money in “what she knows”, rather than seeking the obvious benefits from portfolio diversification. Just because a certain type of industry or security is familiar doesn’t make it the logical selection.

Self-Attribution Bias: An entrepreneur overly attributes his company’s success to himself, rather than other factors (team, luck, industry trends). When things go bad, he blames these external factors for derailing his progress.

Anchoring Bias: An employee in a salary negotiation is too dependent on the first number mentioned in the negotiations, rather than rationally examining a range of options.

Survivorship Bias: Entrepreneurship looks easy, because there are so many successful entrepreneurs out there. However, this is a cognitive bias: the successful entrepreneurs are the ones still around, while the millions who failed went and did other things.

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