Fidelity noted an internal performance review on accounts to determine which type of investors received the best returns between 2003 and 2013. The customer account audit revealed that the best investors are dead or inactive.
The inactive investors were people who switched jobs and “forgot” about an old 401(k).
They left their current options in place, and the dead investors had their assets frozen while the estate was being sorted through.
Buy High, Sell Low
According to Index Fund Advisors, “A growing sense of buyer’s remorse by traders shouldn’t come as a surprise.
A host of academic and industry research points to a really bad tendency by active investors. They panic and bail out at just the wrong times.
Indeed, a typical stock mutual fund investor has lost almost two percentage points a year in total returns from ill-timed trading activities.
These investors are called “Time Pickers.” Too often, these do-it-yourself investors are led by “star” active managers.
The evidence shows that investment professionals also don’t show any greater propensity to time markets than anyone else.
A study by CXO Advisory Group, found during a 12-year stretch (2000-2012) that not one of the 28 well-known managers tracked was able to meet basic accuracy and consistency criteria suggested through earlier research by Nobel Laureate William Sharpe and others.”
“Behavioral finance proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners.
Moreover, influences and biases can be the source for explanation of all types of market anomalies and specifically market anomalies in the stock market, such as severe rises or falls in stock price.”
Prospect theory is structured around the principle that people’s choices are motivated by whether they associate a transaction as a gain or a loss.
People are extremely loss averse. This can be partly explained by the endowment effect, or thinking that since you own something, it is worth more than its intrinsic value.
For example, let’s play a game. I’ll flip a coin. If it’s heads you get $201, if it’s tails you give me $200. Would you play?
A rational investor would look and see that the expected value is positive, so they would participate.
However, most people wouldn’t play until the gains were 2.5x greater than the losses!
From this conclusion, prospect theory shows that people are extremely loss averse, even if it is to their own detriment.
Time In The Market Matters
Investors should not be focused on trying to “miss the bad days”. They should be focused on “being invested during the good times”. This is actually within our circle of control.
If you missed the 10 best days of investment gains from 1998-2017, you missed 67% of potential investment returns.
To make matters worse, the biggest stock market rally days have occurred during corrections or bear markets.
The top 10 best days of trading since 1950 all took place in 1987, 2002, 2008 & 2009. These were some of the worst investment years in history!
Trying to time the stock market will definitely result in lackluster returns.
If You Can’t Lose, Don’t Invest
Never invest any money you could not afford to lose! Adjust your asset allocation to bear your proper risk tolerance based on your age, income, goals, and time horizon.
“Don’t buy anything you wouldn’t be comfortable owning for 10 years.”
Warren Buffett describes that in the short-run the market is a voting machine. BUT, in the long run, the market is a weighing machine.
The stock market has a lot of daily variance and fluctuation, but the noise is meaningless.
This daily variance is especially common with new companies after their Initial Public Offering (IPO).
If the market shut down for 10 years, would you be confident with your investment? Well, if you’re not then you are most likely speculating on price appreciation.
Buffett is a proponent for buying companies with strong management, consistent earnings, and competitive advantage.
Many of these companies Buffett buys are “undervalued” at the time, making them great long-term investments.
What We Can Learn?
Whether it’s in the classroom or at work, we are all conditioned to believe that complexity equates to superiority.
While that is often true, the exact opposite appears to occur with investing. As the old adage goes, keep it simple stupid.
Don’t try to overcomplicate your investment decisions.
- Buy low-cost, low-turnover products
- Ignore daily market fluctuations
- Tune out the talking heads on TV
Best Investors Are Dead
Fidelity’s customer account audit revealed that the best investors are dead or inactive. This can be a great empirical study to show why avoiding emotions is so critical for successful, long-term investing!
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