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A nice writing by Howie Reith. He explains why people end up in disaster spot-on. A good lesson to more than 95% of the members in this forum.
According to Dalbar's Quantitative Analysis of Investor Behavior, the average investor investing in a mixture of stocks and bonds for the last 10 years has made an annual return of 2.63%. While they are making money, they are barely keeping up with inflation and tremendously underperforming when compared to the objective performance of their investments.
The reason for this is the emotions of an investor observing the market.
When a stock is going up, everyone gets excited. This stock is doing well! I'm going to buy some more of this stock! But the market moves in waves. Eventually some or all of the portfolio will go down. "This wasn't a good investment after all. I'd better get out." So they sell.
The investor has bought the stock when it was high and sold it when it was low. This is the natural, emotional way to do things. We are loss averse and attracted to gains, so we buy and sell at exactly the wrong times. This is why so many people lose money when they invest, in spite of the fact that the general trend of the market is up.
Thus "buying and holding" is a frequently suggested method of investment. If you buy a diversified portfolio of investments, and then completely ignore them, the general trend of that portfolio will be to rise in value. If you're watching them, trying to call the market, you are probably going to be wrong most of the time, and you will probably lose money. If one is disciplined enough to invest and ignore the investment, I encourage people to do just that. If someone is not disciplined enough to do that, that is just about the only circumstance where I advise them to hire a financial adviser to be disciplined for them.
According to Dalbar's Quantitative Analysis of Investor Behavior, the average investor investing in a mixture of stocks and bonds for the last 10 years has made an annual return of 2.63%. While they are making money, they are barely keeping up with inflation and tremendously underperforming when compared to the objective performance of their investments.
The reason for this is the emotions of an investor observing the market.
When a stock is going up, everyone gets excited. This stock is doing well! I'm going to buy some more of this stock! But the market moves in waves. Eventually some or all of the portfolio will go down. "This wasn't a good investment after all. I'd better get out." So they sell.
The investor has bought the stock when it was high and sold it when it was low. This is the natural, emotional way to do things. We are loss averse and attracted to gains, so we buy and sell at exactly the wrong times. This is why so many people lose money when they invest, in spite of the fact that the general trend of the market is up.
Thus "buying and holding" is a frequently suggested method of investment. If you buy a diversified portfolio of investments, and then completely ignore them, the general trend of that portfolio will be to rise in value. If you're watching them, trying to call the market, you are probably going to be wrong most of the time, and you will probably lose money. If one is disciplined enough to invest and ignore the investment, I encourage people to do just that. If someone is not disciplined enough to do that, that is just about the only circumstance where I advise them to hire a financial adviser to be disciplined for them.
