Our minds work in funny ways, and one of the most fascinating traits involves our tendency to hang our decisions on irrelevant information. Behavioral psychologists call this tendency “anchoring.” We see it in the investment markets when investors come to regard the price at which they bought an investment as more significant than any other price, or when their predictions […]
Investments
How ‘confirmation bias’ clouds your judgment
First impressions count, but, unfortunately for many investors, they may count too much. The human tendency to rely on first impressions and stick with them despite later evidence to the contrary has been dubbed “confirmation bias” by cognitive researchers. It is a form of mental shortcut that allows us to make decisions when faced with a lot of information. However, […]
Hedge funds: There’s no free lunch
Ever since the big bear market of 2000-02, individual investors have been leery of the stock market. Still reeling from big losses and battered by scary headlines about the dollar’s decline, rising interest rates, and trade and budget deficits, they have flocked to “alternative” investments that promise big returns not tied to the stock market. Hedge funds have been the […]
Investors who want to prosper think long term
Live long and prosper,” Leonard Nimoys character Spock, from the original Star Trek, liked to say. Investors—especially the media-bombarded impatient types of today—should take that adage to heart, perhaps substituting the word “Invest” for the word “Live.” In an era of second-by-second market updates readily available on cable TV and the Internet, investors seem to be having trouble with the concept of […]
Going international helps retirees
The biggest question facing a retiree who wants to live partly off of an investment portfolio is this: Will the portfolio sustain my withdrawal rate, and keep up with inflation, throughout my retirement? Retirees don’t want to run out of money before they die. But they also want a reasonable income that isn’t devastated by inflation. Much has been written […]
Beat the market? Don’t even bother
It has been 30 years since financial economists first theorized that beating the market is almost impossible. Since then, many studies and experiments have confirmed this hypothesis. And yet, every day, millions of investors—egged on by a Wall Street publicity machine eager to encourage frequent trading—believe they can pick winning investments. It doesn’t make sense, argues Burton G. Malkiel, the […]
Why investors are sold inferior funds
Ever wonder why your stockbroker or insurance agent was so insistent that you buy mutual funds from a specific fund family? It may have been because they were paid more to sell those funds. Your sales agent may have even gotten a free trip to the Caribbean for convincing you to invest. The practice is called revenue sharing or “pay […]
Active mutual funds trail the indexes once again
Yet another study comparing the returns of active and indexed mutual funds has named indexed funds as the clear winners. The study of active mutual funds showed that over a 10-year period ending in 2003, active funds underperformed their benchmark indexes by three to one. The poor results were not limited to large stocks, moreover: funds in every stock size […]
Bonds prove that common wisdom can be wrong
Earlier this year a rash of news stories and market commentaries warned investors about a coming decline in the bond market. The Federal Reserve had all but guaranteed it would begin raising interest rates for the first time in four years in order to head off incipient inflation. Rising rates are bad for bonds: their prices fall. The general wisdom […]
Take a random walk down Wall Street
Our analysts will uncover the best stocks to buy. The chart on that stock forecasts a breakout to new highs. Our mutual fund beats the market because our manager is really, really smart. Sure, and the check is in the mail. It is simply amazing that 40-plus years after academic investment researchers began poking holes in Wall Street’s unsupported claims […]