In his famous book, A Random Walk Down Wall Street, Burton Malkiel said, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” In 2012, Research Affiliates of Newport Beach, CA, actually tested this theory and found that the …
Investing Blog
How to Beat a Dart-Throwing Monkey
The Benefits of Being an Informed, Rather than a Reactive, Investor
After experiencing the highs and lows of the Investor Psychology Cycle, people tend to become frustrated and tired of speculation. The silver lining is that they’ve reached an excellent mental state to learn about real investing. Simply stated, the most effective way to escape (or avoid) the Investor’s Dilemma is to become an informed investor. …
Breaking the Cycle of the Investor’s Dilemma
Inflation eats away at money languishing in a bank or under a mattress. The fear of making a mistake rightly makes us pause before sinking our savings into an investment vehicle. But we are emotional beings, and often need to make important decisions based on limited information. Since this will never change, errors are inevitable; …
Recognizing the Emotional Cycle of the Investor’s Dilemma
The chart below illustrates the emotional roller coaster underlying the Investor’s Dilemma. You will probably recognize some of the emotions. If an investor’s account balance increases, he tends to feel happy, while if the account balance decreases, he will be unhappy and may lose confidence in his investment strategy. When an investor lacks confidence, he …
Definition: Transaction Cost
Transaction costs are fees or commissions charged by the broker whenever he buys or sells an investment. Reacting emotionally and deciding to sell when you hear bad news about a company, or buying every time someone hints that something big is going to happen is bad for your portfolio (even as it’s good for your …
Information Overload and Emotional Decision Making
There are over 10,000 publicly traded stocks and 30,000 mutual funds. How can anyone possibly know which are good or bad investments? How can you determine what factors will positively or negatively affect those investments? We are constantly bombarded with information, performance statistics, and marketing messages about investment options. Every firm tries to convince us …
Financial Concept: The Law of Large Numbers.
One way mutual fund managers achieve a four to five-star Morningstar rating is by taking advantage of the Law of Large Numbers. A manager who actively or passively manages a large number of mutual funds has a very high chance of obtaining one or more funds that outperform the stock market across the two-, three-, …
Financial Concept: Probability Theory
Probability is the analysis of random phenomena that teaches us it is not possible to predict the outcome of discrete events, such as the chance that a stock will either increase or decrease in price. According to the law of probability, a fund has a 50% chance of increasing in any year and a 50% …
Elements of the Investor’s Dilemma
Investors typically fear not having enough money to live comfortably when they retire, or becoming a burden to family and friends in their old age. They also have a fear of investing poorly, a fear of missing out on a golden opportunity, and a fear of not being able to interpret complex information. While fear …
Financial Concept: The Investor’s Dilemma
A successful investment strategy requires understanding more than the technical factors involved in growing your investment. It also requires understanding the very real role that emotion plays – not only on an investor but even on an investment professional. For example, a rational person knows that inflation (and, in recent history, abnormally low interest rates) …