Editor's Note: If you practice bad investing habits, you may as well burn your money – no matter what the market's doing. The following insight from Keith, first shared in 2014, can help you identify and halt those habits before they get worse and cost you a fortune…
This research from DALBAR is very graphic…
Over the past 20 years, individual investors averaged a measly 2.53% a year, versus the S&P 500, which chalked up 9.02%. In other words, your average annual return was 6.49% less than what it could have been each year. Ouch.
So what's going on?
When you look back over the last two decades, two things are readily apparent – (a) that the markets have been rocky and (b) that there's plenty of blame to go around. The Fed, the big banks, bubbles, China, Washington, Wall Street, the ECB… it doesn't matter. At some level, they're all guilty.
But you know what? Those two factors are actually NOT the primary causes that doom millions of investors to poor performance.
THIS is the real culprit…
Turns out that every investor is hardwired to do three things that kill returns.
And that's what I want to talk about today – these "bad investing habits" – for one simple reason. If you understand what these costly behaviors are, recognize them in yourself, and learn how to eliminate them, then you can build wealth much more quickly.
And you can absolutely beat the market.
It's a Total Wealth tactic that ranks right up there with picking the right stocks and controlling risk.
So let's get cracking…
Bad Investing Habit No. 1: Recency Bias
Recency bias is the scientific term for when short-term focus trumps long-term planning and execution.
It's what happens when somebody yells "fire" and everybody runs for the same exit at once, despite having entered through any of half a dozen doors in the auditorium.
This is why momentum trading works, for example, or why the news channels seem to cover the same stocks at nearly the same time – because a huge number of people are focused on exactly the same companies simultaneously. Logically, they then become the subject of increased attention and tend to move more strongly or consistently.
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The question of "why" is the subject of much debate among human behaviorists, but I chalk it up to the fact that human memories tend to focus on recent events more emotionally than they do longer-term plans that are put together with almost clinical detachment.
Simply put, recent knowledge overrides longer-term thinking and memory.
And the more extreme the events or the news, the sharper our short-term focus becomes.
This is why emotion is the one investing tactic you should never use. It undercuts absolutely everything you do as an investor.
Dr. John Casti, a world-recognized expert on the science of complexity and the author of "Mood Matters," says "bombshell events are assimilated almost immediately into the prevailing [social] mood," whereas longer-term cycles bear almost no witness to gradual change.
If that doesn't make sense, think about what happened on 9/11. Most of the world's major markets bottomed within minutes of each other on short-term panic and emotion. Then, when trading resumed days later, they began to climb almost in sync as highly localized events once again faded into the longer-term fabric of our world.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.