Can understanding the psychology of investment behaviour help you outperform the market? Probably not, but it can certainly help reduce the probability that you will under-perform the market. This matters, because the majority of private investors under-perform.
One compelling piece of research evidence comes from a careful analysis, carried out by Dalbar research, of the performance of investors in the USA. During the 20 year period from 1992 to 2012 the S&P index had an average annual return of 8.21%. The average investor earned 4.25%. Investors not only under-performed the market, typically they systematically under-performed the specific assets they were invested in.
How did this happen? It turns out that on average investors mistimed the market, buying high and selling low; undermining their own investment performance.
They also spent too little time invested in assets, churning their portfolios and incurring significant transactions costs in the process. Private investors are often…
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