Private investors lose returns year after year - and often without realizing it. While institutional investors such as family offices, endowment funds and pension funds benefit from professional structures and strategic planning, many private investors often face major challenges that negatively impact their performance. But why is that? What factors lead to this performance gap and, above all, how can this disadvantage be compensated for?

How big is the performance gap between private investors, the market and family offices?

The long-term performance shows a considerable discrepancy between the various investor ^groups1:

Regardless of the period under review, family offices were able to achieve double-digit returns on average every year between 1992 and 2022. A purely liquid portfolio consisting of 70% US equities and 30% US government bonds could not keep up with this performance, but still achieved stable, single-digit returns. Private investors who chose a similar investment structure lagged behind both the benchmark and the returns of the family offices with a low single-digit performance.

These figures from the USA impressively demonstrate that private investors generally lag behind institutional market participants. Academic research and empirical data suggest that similar results can also be expected in Germany. The long-term impact of this discrepancy is enormous due to the compound interest effect. A lower annual return means a drastic reduction in total wealth over decades as the growth of capital slows exponentially.

This is clearly shown in the following chart. Due to the compound interest effect, USD 100 invested by a family office grows to USD 4,770 in 30 years. A portfolio consisting of 70% equities and 30% bonds achieves only around 22% of this performance with USD 1,077, and therefore still performs significantly better than private investors, for whom USD 100 only becomes USD 255.

Causes of the performance gap: The interplay of psychology and structure

The reasons for the poorer performance of private investors are complex - a mixture of psychological factors and structural market conditions.

1. psychological distortions

• Herd instinct & media hypes: Many private investors follow current trends or speculative hypes (e.g. meme stocks, crypto rallies) instead of making long-term, well-founded decisions. The media reinforce this effect by constantly disseminating new "insider tips" or short-term market forecasts - which often generate more clicks than added value. Counter-cyclical action against the trend is not easy, but it is very successful.

• Loss aversion & excessive reallocations: Private investors often make their investment decisions for emotional rather than rational reasons. They tend to sell after market falls for fear of further losses and get back in too late during recovery phases. Banks and brokers benefit from this uncertainty, as frequent rebalancing generates transaction fees.

• Home market bias: Many investors prefer to invest in their own country because they are familiar with these companies. Banks and advisors often encourage this tendency by preferring to recommend local products rather than offering truly global diversification and thus opportunities in high-growth regions.

2. lack of knowledge & limited access to investment opportunities

• Lack of financial education: Many private investors underestimate the importance of the compound interest effect and do not understand why long-term investing is more effective than short-term speculation. Financial products are often presented in a complicated way, which makes it more difficult to make informed decisions.

• Limited access to professional investment strategies: While family offices have specialized research teams, private investors usually rely on the media, financial blogs or unqualified advisors who often pursue commission interests. Many of the best investment opportunities simply remain inaccessible to private investors.

• Unclear (risk) strategies: While institutional investors use structured strategies including risk models and diversification measures, private investors generally lack clear strategic planning and therefore also approaches to risk management (source: HRI FINVIA 2022 study).

3. structural (cost) falls & their impact on returns

• In 96 out of 100 cases, financial advisors are unable to implement the asset structure they would actually recommend to their clients because they are tied to the financial products of their employers or banks.

• Focus on product sales instead of overall wealth management: Banks are interested in selling high-commission products instead of developing a holistic wealth strategy. As a result, total assets are suboptimally aligned through a series of isolated solutions (source: Private Wealth Management Study 2020; Stephan Unternehmens- und Personalberatung GmbH).

• High fees and commissions: Many private investors pay excessive management fees for actively managed funds or superfluous advisory costs that reduce their net return.

• Lack of controlling & transparency: Without clear and standardized reports on allocation, returns, risk and costs, it will be difficult for private investors to make well-founded investment decisions. However, these are absolutely essential as a basis for decisions on adjustments to wealth .

How can private investors improve their performance in the long term?

Despite these challenges, there are proven strategies:

• Strategic planning with flexibility: A long-term investment strategy helps to remain level-headed in volatile phases and is the basic building block of risk management.

• Data-driven decisions: Evidence-based investment approaches avoid emotional mistakes. Those who focus on facts rather than headlines have the better cards in the long term.

• Broad diversification: A global investment strategy reduces risk and improves long-term returns.

• Using alternative investments: Family offices rely on alternative investments as important portfolio components - private investors should also consider them.

• Cost minimization: Avoiding unnecessary fees increases the net return.

• Establish controlling: A regular comparison of the actual status with the target status of the strategic goal pursued ensures that the portfolio remains optimally aligned.

• Make conscious use of the compound interest effect: If you invest for the long term and avoid unnecessary reallocations, you can make the most of the power of compound interest for your wealth .

Conclusion

The performance gap between private investors and institutional investors is not just a question of capital, but also of strategy. While family offices benefit from targeted planning, risk management and access to exclusive asset classes, private investors struggle with high costs, emotional mistakes and a lack of diversification.

The good news is that if you follow proven investment principles, think long-term and keep yourself well informed, you can close this gap. The key to success lies not only in access to exclusive investments, but also in the disciplined implementation of a structured investment strategy that makes optimum use of the compound interest effect.

At FINVIA, we have incorporated all these insights into the FINVIA approach - with professional strategies that are also accessible to private investors.  

You can find out even more about the performance gap between private investors and institutional investors in these studies: e.g. The Behavior of Individual Investors, Brad M. Barber,T. Odean (2011), Calvet, L. E., Campbell, J. Y., & Sodini, P. (2009), Prospect Theory Daniel Kahnemann, Amos Tversky (1979); A Survey of Behavioral Finance, Richard Thaler, Nichaolas Barberis (2003); Investor Psychology and Security Market Under- and Overreactions, Kent Daniel, David Hirshleifer and Avanidhar Subrahmanyam (1998); The Disposition Effect and Underreaction to News, Hersh Shefrin, Meir Statman (1985), "Gambling the World Away: MyopicInvestors" by Bernhard K. Meister (2023)

Sources: ^1Historicalperformance in USD, own calculations; Dalbar QAIB Report 2023, Thomson Reuters, market is defined as 70% MSCI World TR USD and 30% US Treasury Notes TRI USD, Yale Endowment Fund (2024); UBS Global Family Office Report (2023)