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Our Own Worst Enemies
Investing isn't rocket science, it's actually pretty simple. But simple is not easy, and successful investing is certainly easier said than done. In fact, there's plenty of research that shows individual investors come up short. The chart below compares 20 years of annualized returns for gold, stocks, bonds, and real estate to those earned by the average individual investor.
(Gold = gold bullion prices, Stocks = S&P 500 Index, Bonds = Barclay's Aggregate Bond Index, Real Estate = median single-family-home sale prices, Individuals = Dalbar Inc's analysis of individual investor returns.)
Not only did Individuals underperform in this example, but the underperformance is a consistent theme in long-term periods throughout history. That means we could have beaten the average individual by simply dividing our portfolio across the asset classes, or even just randomly picking any asset class! The extent of underperformance doesn't even seem reasonable.
And actually, that may be the problem. Though we like to think we're logical and reasonable, humans can behave quite irrationally. Especially when it comes to things we're emotionally attached to (like our life savings), we can be controlled by feelings like fear and greed (when's the last time those two resulted in anything positive?).
This phenomenon is the focus of an academic field known as behavioral finance. Research within the field has identified a long list of "cognitive biases" that cause us to make irrational financial decisions. The table below shows some of those biases (a primer on behavioral finance is available at the CFA Institute website).
Do we intentionally sabotage ourselves, or plan to be our own worst enemies? Of course not, but when it comes to managing our own money we're often unaware of the psychological biases that cause us to do the wrong things at the wrong times. That's why it helps to involve another party, preferably a qualified professional who isn't emotionally invested and who can provide an outside perspective to help make good financial decisions. It's similar to why even the world's best athletes still work with coaches and trainers.
Put the right kind of knowledge, experience, and perspective on your side of the table with a complimentary financial review from Bellwether Capital Management LLC (BCM). You'll consult with a local, knowledgeable, and experienced adviser who will answer your questions and get you moving in the right direction. There's no cost or obligation, but only so much time is available for free reviews. Contact BCM to reserve yours today.
Bellwether Capital Management LLC and its representatives do not provide tax, legal, or insurance advice. This article is provided for informational purposes only and does not represent advice of any kind. While the information provided is believed to be correct its accuracy is not guaranteed. You should perform your own due diligence and consult with relevant professionals to determine if and how this information can be used. Furthermore, you release Bellwether Capital Management LLC and its representatives from any harm or liabilities connected to your use of this information.
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