To put it very simply, an investor’s goal is often to achieve relatively high returns on their investments over the long term. However, even with roaring stock market, studies have shown that the average investor has a pretty dismal track record. Below is a chart that is highlights this:
For context, let us consider the difference between 9.5% return (S&P 500) and 3.6% return (average investor) as we saw on the slide before.
Over 20 years, $10,000 dollars turns into:
$20,286 at 3.6% return...and $61,426 at 9.5% return.
A difference of more than $40,000 dollars! Understanding how to be a well-behaved investor can mean the difference your investments growing tremendously or your investments growing very very slowly.
Let’s understand the behavior behind this terrible outcome so we can avoid it!
Experts theorize on some reasons why amature (as in not professional, not meaning dumb) investors do so awful compared to the broad market. I will list two of these reasons below. Read them, then avoid them like the plague!
Amature investors often try to “Time the Market.” Meaning they see ebbs and flows of the business cycle and attempt to buy in at a low (or sell at a high). This is beyond challenging to do. I would say it is hopeless. My personal finance idol Brian Preston from the Moneyguy show puts it simply, “Time IN the market is more important than TIMING the market.” If you are concerned as to when to buy, consider using a Dollar Cost Averaging approach. Basically, put money in gradually over time rather than all at once.
Next, Amature investors sometimes try for the “home run” they don't want to match the market... they want to beat it. The vast majority do not succeed. We have seen the power of compound interest. It can make you tremendously wealthy. Don’t be greedy. If something claims to yield returns much higher than the broader market, you should be extremely skeptical. Imagine it as though someone claims they can make you jump 8 feet high. Maybe they can... but I doubt it!
Comentarios