“Beat the Market” Mentality versus Risk / Reward Analysis
Amateur investors have a “beat the market” mentality which leads to dangerous behavior and hurts their returns. Amateurs chase after last year’s hot investments (after they’ve already gone up!) and they follow the crowd. The financial media caters to this by publishing lists of the “10
Best Investments to Buy Today!” (which are never the same, and again, usually something
that’s already gone up). Professional investors have a risk/ reward analysis which guides their
behavior. Professionals look at their investment objectives to determine what kind of return their portfolio should produce and then build a diversified mix of investments according to the risk
level their goals can tolerate.
Worry About What They CAN’T Control versus Focus on What They CAN Control
Amateur investors worry about what they can’t control. Amateurs worry about the stock market, interest rates, the price of oil, wars, and who the Federal Reserve chairman is. The problem
with this worry is that amateurs act on it and make changes to their portfolio and do the wrong thing at the wrong time. Amateurs will worry about the stock market and say “Now isn’t a good time to invest” so they leave their money in cash instead. Or they worry about missing out on a
hot stock that went up last year, so they buy it at the peak. Professionals focus on what they CAN control – their objectives, the quality of their investments and the diversification of their investments. A professional investor’s financial plan, known as the Investment Policy Statement, determines the mix and quality of their investments and a professional doesn’t try to time the market based
on short-term events beyond their control.
How can you act like a professional investor?
The studies show that an amateur investor’s effort actually has a negative affect on their portfolio. Obviously, you need to think and act like a professional investor. You need to hire the best financial planner or investment advisor you can. When you meet with your investment advisor,
you will review your goals and objectives to create your financial plan. Your financial plan will determine the diversification and quality of your investments, and the rebalancing of the portfolio. With professional help and a financial plan you can stop being an amateur, and more
importantly, you can actually reach your financial goals!
Dalbar, Inc., 2007, “Quantitative Analysis of Investor Behavior – 2007
