The average retail investor has advantages over fund managers.
However, the average retail investor does worse than the market. Most just buy high and sell low - a kind of herd mentality.
In quarterly summaries, Fidelity demonstrated this more than one time. It shows the retail investors moved to money market fund when the market was at temporary bottoms (or close to), and moved to equities when market was at temporary peaks (or close to). It could be a good contradictory indicator if Fidelity or any fund company publishes this money market flow consistently.
Morningstar has similar proof. During 2000 to 2010, equity funds earn an annualized return 1.6% while an average investor captured a .2% return due to moving in and out of the funds at the wrong time.
Click here for Psychology 101 for investing.
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(c) TonyP4 2012. Written in 12/23/12. Last updated in 12/23/11.
Disclaimer:
Do not gamble your money you cannot afford to lose. Past performance is a guideline and does not guarantee future performance.
All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
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Searcher said:
ReplyDeleteGuess it is a given that I, as a proxy for the average investor, am very likely to buy high and sell low because I become giddy, or at least complacent, at higher highs and frozen with fear and indecisive at a declining market until the psychic pain forces capitulation. Should I have the good fortune to encounter this article and divest, I'm not sure that I'll have the same fortune to overcome my fear and general malaise in avoiding a bear 'fake out'. Thus riding the market up looking for confirmation until, guess what? I'm buying at the top.
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ReplyDeleteSearcher, All investing and market timing are about educated guesses and hopefully we guess right more times than wrong. However, we should know our limits and our risk tolerances - i.e. do not risk the money you cannot afford to lose. Treat cash as parking for next opportunity and/or low cost insurance.
ReplyDeleteI've my share to blame myself of too much cash when the market surges and vice versa. In other words, we should play it safe and be emotionally detached from our investment decisions.
Clay said:
ReplyDelete"Despite all of the warnings by the investment industry to stay fully invested, mass fear during bear market cycles causes most investors to sell at or near the bottom. Subsequently, these same investors only get back into markets when all seems well and market prices are at or near tops. This sort of behavior is almost inevitable for most individuals and it obviously results in sub-par performance."
In my nearly 40 years in the investment mgt. arena, I find that a very small percent sell at bottoms and buy at tops, and it the same ones over and over. The long term investor, from my experience, has been the clear winner in holding good stocks through thick and then. The trader may miss a bear market, but usually leaves very early, and comes back in very late. There's the formula for sub par performance.