Performance Perspectives Blog

Why retail investors could care less about rates of return

by | Aug 27, 2013

I often hear from those who serve the retail market that they are rarely asked for their rates of return; this seems a bit odd, as it would make sense for investors to want to inquire into a prospective manager’s track record.

An article in this past weekend’s WSJ might hold the key to a possible reason: the dislike for mathematics.

Alexandra Wolfe’s article, “Edward Frenkel and a Love of Math” explains how most folks avoid anything with numbers. Frenkel, a professor at UC Berkeley, suggests that “you say the word ‘math’ and people shut down.”

When I was working on my second masters (an MBA), I also served as an adjunct professor, and once taught a class on business math. Perhaps because of my approach, I was able to get students, such as those Frenkel references, to find some enjoyment in math. But for most folks it would be difficult to break through the walls they’ve constructed.

I wonder if most adults could answer the following question: an investor begins with $10,000 and earns a 4% return; how much money did they make? Do most adults even understand what a percent is? If a financial planner or advisor tells an investor that his/her return was 6.12% versus the benchmark’s 5.75%, would this mean much? Would they think it’s a good or bad thing?

Further research would definitely be needed to try to uncover the basis for the avoidance of the subject, but I suspect that ignorance might be part of it.

Free Subscription!

The Journal of Performance Measurement

The Performance Measurement Resource.

Click to Subscribe