Why Does the Average Investor Keep Getting Clobbered?

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club


Here’s the annual small investor’s behavior slap, compliments of Dalbar.

Dalbar is a Boston-based behavioral finance research group that has been collecting data on the small investor for more than 30 years. And its current report is a virtual repeat of last year’s.

If you’ve followed me for any amount of time, this won’t come as a surprise... The small investor is getting killed, and he’s doing it to himself.

The little guy is lagging the market badly - how does 4.7% below the S&P 500 sound? That’s worse than it was last year.

And it isn’t about excessive fees or bad advice; it’s all about investor behavior - jumping in and out of the market and always at the wrong times.

This losing behavior is being driven by five factors: fearing losses, focusing on one part of a portfolio without considering how it affects the rest, focusing on past failures, being excessively optimistic and following the herd.

But Dalbar had a new factor this year: media response. The media has a bias to sell products from its advertisers, and the small investor is buying into it in a big way.

The two factors that are always responsible for most of the losses are herding - doing what the herd is doing - and loss aversion - not doing something because of past losses.

And all the investing behaviors exhibited by the little guy are consistently 180 degrees out of sync with where he has to be to make money.

And the huge run-up in the market since the election is driving the little guy’s specialty of buying high and selling low to new heights.

In case you don’t already know it, we will have another sell-off. The longer this market runs and optimism grows, the worse it will be.

A recent MarketWatch article about Richard Thaler, Nobel Prize winner in economics, said it best: “We are full of flaws forcing us to make mistakes that cost us health and wealth. We need help.”

I have been saying for years that the best thing to do in almost all cases is nothing. Jumping out of the market - or even selling a few holdings - based on fear will always cost you money, and it is the toughest behavior to overcome.

If your stock or bonds make you uncomfortable in this or any market - up or down - you’re in the wrong investments. It will cost you money.

No market can run up forever. This one has stretched the limits of new records, but it too will end. The question you must ask yourself is “Are you mentally prepared for the sell-off, and how will you react when it happens?”

Most of us can’t replace what we have saved and invested. Make sure your head is on straight about the inevitable correction.

Good investing,


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