Is it Really an Amateur Sport Investing in Stocks?

Did you ever catch those infomercials on TV that try to draw you into investing in stocks and trading in them? Looking at them, you could be forgiven for thinking that playing the stock markets and making thousands of dollars was something a kid could do through summer break. Researchers who have looked into the the way these stock market enthusiasts handle their buying and selling decisions see one thing show up very clearly: many regular people even with all the good intentions and a modicum of stock market education, often end up deciding to buy or sell at the most unfavorable times. But when they have investment advisors, they don’t often do a whole lot better. Does this mean that investment advisors don’t really do much that’s useful?

The answer usually turns out to be that individuals investing in stocks often have very set views on what to do. You’d think that the most valuable information that investment advisors let their clients have would have to do with the kinds of stocks or mutual funds to go with. As it turns out, restraining clients from buying or selling at the wrong time is often the most valuable thing that investment advisors end up doing. It requires a very determined advisor who happens to have a great deal of personal influence with a client to actually sway him from doing the wrong thing. This is what researchers have found out studying what exactly happens at an investment firm that takes on individual clients. What they have found turns out to be pretty enlightening. Individuals investing in stocks who act on their own instincts or their own views can on average, end up losing 5 percentage points every year.

Why are investors hell-bent on calling the shots, making hastily thought-out decisions and harming their own interests? It could be a kind of obsessive behavior is what the researchers say. People feel a kind of need to be actively and aggressively involved investing in their stocks. And the more unpredictable the stock markets become, the more they have to get involved and mix things up. It isn’t always anticipated unpredictability in the markets that makes them want to stir things up. If they find that the markets have been volatile in days past, that will inspire them to go stir things up just the same. Even if they have no information at all about what things are going to be like the following day.

Individual investors investing in stocks have improved over the past few years. It used to be that the difference between what individual investors got and what professional investors got was pretty wide – a 10 percentage point gap. These days, it is perhaps three or four percentage points. Perhaps individual investors have come as far as they can on their own wits and it is time they begam to listen to their advisors.