Despite popular Hollywood portrayals of how investing works — a smart suit and someone with the last name Sheen or Douglas usually does the trick — research shows that most of us still try to time the market, typically resulting in buying high and selling low. No one likes being told they’re wrong or that they don’t have a grasp on the situation, but this graphic could be helpful in examining why many of our buy/sell decisions are wrong, why they cause damage to our portfolios, and how there can be better ways to invest for maximum returns over the long run.
Investors thinking they know how to work the stock market by timing their investments are, on average, delusional in how well their portfolio is actually performing. To put it into context: The return of the average investor is 1.9% over 20 yrs — due to poor buy and sell decisions. Investors who simply invested — and kept — their money in the S&P 500 earned an average of 8.4% over the same period; with diversified portfolios doing even better.
The true problem lies in the fact that the majority of buy/sell decisions are wrong; even if you think you’re smarter than the masses. Barrons recently revealed that 85% of all sell or exchange decisions are incorrect. The major culprit of these investing blunders are emotional biases that drive investors to respond to the market’s ups and downs. People have been leaning too long on the idea that it’s best to sell stocks when they hit rock bottom, and then put their money in conservative assets like bonds when they are at the top.
Head to Jemstep or click the image below for a full-sized view of this detailed graphic: