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Individuals = Underperform
The average individual investor underperforms by a wide margin over time…
For most, index investing is a much better place to park money.
Imo, the underperformance is largely due to emotions. Behavioral finance is fascinating!
This chart always shocks me. The magnitude of underperformance is insane
@gallagher_ip very shocking indeed. It’s sad really cause the average person’s opportunity cost of wealth is very high if just index investing…
Does that include traders too?
I wish there was a separate category for buy and hold investors to see how well did they perform.
@umerraja Traders underperform by an average of 6.5%. Retail long term by 1.5%
@rpinvestments interesting, thanks Ben! Where did you get those stats from?
Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors
Of course that is just one study. But most other studies show similar under performance of average buy and hold over average traders.
@rpinvestments thanks! Yes I’m sure the stats still hold
@beaver_cap It has always been like this. Problem is 99% of retail investors don't even have a clue.
@kostofff agreed. Need better education!
@beaver_cap Which does not take too much time ...
@kostofff or rather they don’t do sufficient DD on what they buy and are generally very impatient and end up chasing the hot stuff and get burned.
@sammeciar Either way, the result is the same.
Plagiarism is unethical
I am a huge fan of behavioural finance too! Thinking fast and slow by Daniel Kahneman led me down a rabbit hole of the topic. I think a lot of people don’t enjoy the passive approach of investing because it’s not glamorous but for me I find that index investing is the way to go . After reading John Bogle I find that my mind finds comfort in keeping things simple - “don’t look for the needle buy the haystack”
@joeyhirendernath agree with you here! I use index investing for large majority of family investments then I run a stock portfolio outside of that with a smaller amount.
It's only been a few years for me, but I've definitely underperformed the major indexes. Hoping that changes as I learn and build out a process that works for me, but if not I know that my ego isn't big enough that I won't someday cash it all out and go 80/20 index!
Indexing is definitely the best choice for most people. But im curious to see how indexing compares against stock portfolios that also trade options
Did the study mention any behaviors that lead to the average investors underperformance? (Such has trading too much, or being too overweight one sector, etc)
Indeed, lots of evidence that retail investors should index in low-cost ETFs and not mess with it
Behavioral finance identifies the specific behaviors that drive large losses based on deep econ theory
I read this paper as a PhD student (https://onlinelibrary.wiley.com/doi/full/10.1111/0022-1082.00072) and decided after being a professor for a while to go out and build analytics that identify and quantify biases so investors can improve tactically and not let emotions destroy their wealth
@profofwallstreet amazing, will take a read. Thanks for this Amos!
@beaver_cap site is in beta, new release coming this quarter
If of interest, I post insights to LinkedIn as well: https://www.linkedin.com/feed/update/urn:li:activity:7007049566420168704
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