You’re a Bad Investor. Here’s How to Get Better.

[hubag bohol]

By John Maxfield
August 3, 2013
http://www.fool.com/


The chances are good that you're a bad investor. I'm sorry if that comes as an unpleasant surprise, but if you have any doubt about it, I encourage you to compare your performance against that of the S&P 500 (SNPINDEX: ^GSPC  ) . I did, and it was humbling.

If it makes you feel any better, you're not alone.

[hubag bohol]

An annual study completed by DALBAR, a leading source for information on investor performance, found that the average investor underperformed the broader market on a multi-year time frame in 15 out of the past 15 years. That's right, 100% of the time!

It's all spelled out in the following figure, which I included in an article yesterday to show the most recent decade's worth of 20-year returns for the average mutual fund investor compared against the S&P 500.

[hubag bohol]

What's behind the underperformance? Overconfidence.

Not unlike driving, where we all consider ourselves above average, investors think they're better at investing than they actually are. This overconfidence leads them to trade too often and thereby exposes their portfolios to higher transaction costs and a bevy of cognitive biases that almost invariably produce substandard returns.

[hubag bohol]

So, what's the solution?

Quite simply, you have to come to terms with the fact that overconfidence, as my colleague Morgan Housel has pointed out, is an investor's worst enemy. To believe that you have an informational edge over other market participants is, to put it mildly, fanciful.

[hubag bohol]

To believe that you have an informational edge over other market participants is, to put it mildly, fanciful.

Butangi!