Posts filed under “Psychology”

Why Investors Fail

Nice piece by BMO Nesbitt on why investors fail:

“Individuals have historically underperformed the markets, earning just 2.6% vs. the S&P 500 gain of 12.2% between 1984 and the end of 2002*. Research in the U.S. has shown that this dramatic underperformance comes as a direct result of client behaviour, or more specifically, the attempt to avoid bad performance while seeking out better returns.“

* “Quantitative Analysis of Investor Behavior“, Dalbar Inc., July 2003

What’s the cause of this underperformance? Assuming there is an appropriate asset allocation plan in place (Diversification in styles, geography, managers, and appropriate weightings for each security), what is the dominant problem for most investors?

In a word, EMOTION.

Here’s a look at the classic cycle of investor sentiment:

Sentiment Cycles within the Market (a/k/a Investor Emotions)
click for larger graphic

Major emotional risks equity investors face include:

• Herd mentality
• Likely investment at the top (Buy High)
• Likely withdrawals at the bottom (Sell Low)
• Deviation from long-term strategy and discipline

We discussed the biology of this previously in Know Thyself.


Why Investors Fail! (pdf)
Stephen Biddle,
BMO Nesbitt

Category: Investing, Psychology

Anticipating the Dominant Stories

Category: Investing, Markets, Psychology

Chart of the Week: 10 Year Yield (Post-Crash) vs Japan

Category: Fixed Income/Interest Rates, Psychology

uh-oh: Time Magazine on Housing

Is this the Magazine Indicator at work? First Fortune, now Time Magazine: We’ve seen some terrific Contrary market calls from magazine covers:  Time magazine naming Jeff Bezos man of the year in December 1999 marked the top of the internet bubble; The March 21st  2005 Newsweek cover story, “The Incredible  Shrinking Dollar,” marked a key…Read More

Category: Psychology, Real Estate

Enjoy It While It Lasts

Category: Investing, Markets, Psychology

Quote of the Day

Category: Psychology, Trading

Templeton’s 22 Principles For Successful Investing

Category: Investing, Markets, Psychology

Apprenticed Investor: The Zen of Trading

Category: Investing, Psychology, Rules, Trading

Apprenticed Investor: Don’t Speak (part II)

Category: Investing, Markets, Psychology

The Ten Trading Commandments

Category: Psychology, Trading