The Powerful Psychology Undermining Your Returns
There can be little dispute over the sad state of returns for many investors. My colleague at the BAM Alliance, Carl Richards, used Morningstar data to note this disturbing fact: The average U.S. stock mutual fund had a 10-year average return of 8.18 percent at the end of 2013. The average investor only earned 6.52 percent on his or her investments.
Although it’s sad the average investor can’t achieve returns equal to the returns of the average mutual fund, the reality can be much worse. Many investors hold only individual stocks. There is evidence that their returns from these holdings would be significantly higher if they simply bought and held them, rather than trading in and out, according to a 2004 University of Michigan paper, “What are stock investors’ actual historical returns?” by Ilia D. Dischev.
There are many causes of bad investor behavior. See if you recognize yourself in any of these scenarios:
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