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Market Return>Your Return

October 23rd, 2006 at 09:30 pm

Why cant people beat the market? Everything I read talks about how most investors in the stock market always lag the S&P. Are people being stupid or just ignorant? I think it’s a combination of the two. The worst investor is an uninformed “in it for the short term” kind of investor. They buy the “hot” stocks when prices are high and sell when prices are low. Good strategy…. Not! The best investors on the planet always plan for long term results and they usually study the companies or sector they are investing in. Would you drive a car on the highway without first learning the basics about driving? Hopefully you said no, but most peoples investing styles is to jump right on that highway and learn as you go. This investing style will lead to many bad crashes and a lot of money loss.

There’s so much information for investors that it makes it hard to believe that people can still lag the S&P. First, if you don’t know what you are doing invest in ETF funds. At least you will be matching the return of S&P. Secondly, stick the companies you know and trust. More people lose their money in companies they know nothing about. Pick companies that have a long and positive history and seem to grow at a steady pace.

Jonathan Clements, a writer for the Wall Street Journal, wrote “There's a lesson here for investors. Want to improve your results? Try sticking with funds that generate consistent performance. Take balanced funds, which typically hold 60% stocks and 40% bonds. These might seem like an unexciting choice. But that lack of excitement leads to better investor behavior. Over the past 10 years, balanced-fund investors have enjoyed a dollar-weighted return of 8.8% a year, not much below their funds' 9% average total return.” Boring investors usually end up making more money than bad active investors. Boring investors buy less risky securities and let their money grow, while bad active investors buy and sell at the drop of a dime.

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