The investment world is filled with trite aphorisms that on further study turn out to be less than helpful. Call it coincidence, call it serendipity, two investment-myth busting lists came to our attention today.
Paul J. Farrell at Marketwatch.com has his list of 10 contrarian thoughts built on the findings of behavioral finance.
5. Trust yourself
Get this: 80% of all investors claim they’re “above average.” Behavioral psychologists call this “optimism bias.” Unfortunately, the majority who believed they were in fact beating the market actually finished anywhere from 5 percentage points to 15 points behind the S&P 500. Warning. Macho optimism may work in business negotiations, but optimism’s irrational in the market! Go contrarian, act rational.
Christine Benz at Morningstar.com takes to task five investment myths.
Indexing Only Works for Large-Cap U.S. Stocks
I’ll admit that this one makes intuitive sense. Large-cap U.S. stocks are the most heavily researched securities in the world, so it stands to reason that this would be the area where active stock-pickers would have the hardest time beating their benchmarks (and in turn a ripe area for indexing). Nonetheless, there are powerful arguments for indexing–shadowing a benchmark such as the S&P 500 rather than trying to actually beat it–across a broad swath of asset classes, from small-cap stocks to bonds to international equities. Chief among them are low expenses, which give index funds a big head start over actively managed vehicles. And I’m not just talking about expense ratios (although those are important)–I also mean trading costs, which aren’t included in a fund’s expense ratio. Because index funds generally trade less than actively managed vehicles, their total cost loads are generally substantially below those of active offerings.
The bottom line is that investors need to question what is perceived to be âinvestment wisdomâ? and be responsible for their own investment decisions.