Individual Investors Make Terrible Decisions – So STOP Making Them!

by Darwin on June 29, 2013

I just came across yet another report (Marketwatch) demonstrating the abysmal state of US retail investor performance compared to basically doing nothing.  We just can’t help ourselves.  Based on this latest research of 20 years of data, here are a few depressing facts:

  •  Over the past 20 years, while the S&P500 annualized return was 8.2%, the average retail investor returned 4.3%.  That’s really pathetic.
  • Reason #1 – Market timing (article calls it emotion-based investing).  Basically, people are unable to just leave well enough alone.  Rather than having a strategy and sticking to it, they find the need to pretend as though they can predict the future and buy when stocks are low and sell when they’re high.
  • Reason #2 – Fees.  Investors also believe actively managed mutual funds will outperform the indices, which they don’t tend to do.  They chase high past returns which really have no correlation whatsoever to future returns.  It’s just luck (read “Fooled by Randomness” if you don’t believe me).
  • Reason #3 – Turnover.  Actively managed funds have higher turnover which further reduces returns.

Recent Evidence of Horrible Decision-Making

Gold. I’ve said it before and I’ll say it again; aside from a small portion of a portfolio as a purported inflationary hedge, gold is pretty much useless.  It generates no income stream, has very little industrial use compared to other precious metals and was really just the result of a bubble over the past decade.  Yet retail investors went nuts buying into physical gold, ETFs, gold mutual funds, etc.  When your mom starts asking if she should buy gold, that’s when it’s time to sell.  Well, well, it’s down 27% on the year vs a gain of 13% on the year for the S&P500.  All the “experts” are citing old dips saying gold will still rally to $4000/oz in the next few years, etc., but they just look sillier by the minute. Logically, if gold at a higher value down the road were such a sure thing, why wouldn’t it be moving up instead of down?  That’s just plain foolish.  It’s called dogma.  The facts and logic don’t matter.

We saw the same with retail investors buying Apple and we’ll probably see a new wave of real estate euphoria as well now that home prices have finally shown a trickle up.  Bitcoin is another ridiculous phenomena; people are dumping their life savings into what may turn out to be the most prolific internet hoax of all time (and what’s to prevent anyone from making the next Bitcoin, thus rendering the current system useless?).

It’s easy to look back and say “told ya so” for anyone.  But what’s not so easy (as Americans demonstrate time and time again) is to have a strategy and stick to it.  During the 2008-2009 financial crash, I didn’t adjust my 401(k)

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1 Bobby July 2, 2013 at 3:37 am

It’s imperative that you discipline yourself to follow a proven system that has a proven track record.
One that you have confidence in and feel comfortable with.
It NEVER is easy.
It helps if you’re passionate about it and can put up with a LOT of discomfort.
I think the best advise that I can give you at this time is – YOU HAVE TO

2 Betsy @ ConsumerFu August 20, 2013 at 8:03 am

Thank you. I’ve watched family members waste money on fees because they think chasing a buck or two will pay off in the end.

3 Victor Wooten September 2, 2013 at 12:47 pm

Everything takes longer than you think.

4 Jon Haver @ September 20, 2013 at 7:57 am

I have seen some of friends to invest without having a strategy. Then there is a situation, its hard for them to handle it with proper plan. These is really depressing. Thanks for your good post.

5 Jon Maroni November 19, 2013 at 7:02 pm

I just went away from investing in individual stocks and focusing on index mutual funds for the exact reasons you have listed here. I’m not smart enough to time the market, so why try? I’ll take the average return of the market over the course of an investing lifetime rather than try and chase potential returns that probably won’t materialize.

6 Modest Money November 24, 2013 at 9:01 am

Its evident now more than ever, we can’t beat the market consistently, even “experts” have problem doing it. Our best best is to spread our bets and invest wisely in index funds, at least this way we’ll always get the best of the market without incurring the heavy fees.
About bitcoin, well, I disagree with you, I do see some future in it. Ofocurse its flawed right now as it tries to establish itself but when the dust settles, I think we might see the makings of a true e-currency in one way or another.

7 Andrew March 10, 2014 at 8:00 pm

I know you don’t like gold as an investment, but what do you think about other precious metals? Especially the ones that have industrial uses.

8 John @ FirstStepFinance May 2, 2014 at 9:22 pm

I have seen some individuals to get without having a technique. These is really disappointing.

9 Jack Gibson December 5, 2014 at 5:48 am

I think all individual don’t make terrible decision. however, Some may take terrible decision due to lack of knowledge.

10 Cyrel @ Austral Accountant March 2, 2015 at 2:38 am

I guess, before you jump into something you’ve got to make sure that you understand what you’re getting into.

11 Johnson February 7, 2016 at 8:32 am

Nice read! Mind sharing more about the concept of strategy? What kind of strategy could an individual investor relies to? Thank you in advance for your sharing.

12 Projeksiyon Perdesi December 19, 2016 at 5:59 am

I have seen some of friends to invest without having a strategy. Then there is a situation, its hard for them to handle it with proper plan. These is really depressing. Thanks for your good post. I think all individual don’t make terrible decision. however, Some may take terrible decision due to lack of knowledge

13 Norah @ Money Management IQ March 6, 2018 at 1:21 am

This is an article to read and re-read again. Excellent job Darwin! A good investor thinks of ways to not lose money. But a bad investor thinks of ways to make money. Their decision is based on these two wants.

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