As Adam likes to say: “Investors Suck Wind.” He has studies showing the average investor earnrns annual gains of 5.2% vs. the 9.9% returnrned on stocks overall – that’s just over half. And this is over the long-term bull markets like from 1983-2007.
When I was talking to a bunch of financial advisors in the mid-to-late 1990s, one of their favorite charts (other than my Spending Wave) was the Dalbar study showing investors made more like 4% profits instead of the 10%-plus average for stocks back then.
Why is this?
Most investors need to watch a trend long enough to muster up the nerve to jump in – that’s a nice way of saying they get in too late.
With corrections every four years on average and substantial corrections every 10, the first investors hang in too long hoping to get back to even. Then they finally panic and sell when stocks go down far enough to push their fear button.
Fear and greed are the two polar opposites that drive investing. The problem behavioral psychologists uncovered is that fear trumps greed. Most people need to see at least a potential gain 50% higher than the potential loss for them to go for it.
In other words: we value avoiding pain or loss more than getting pleasure or pain… that’s just human nature.
This is the same principle that marketers, and I, observe in consumer behavior when adopting new products, technologies or social values.
There is an S-Curve patternrn of how we respond, as the chart below demonstrates:
The reason the top 0.1% to 1% control 50% of the wealth in this country is that they’re often the first to recognize a new trend, and that is risky. That’s why the 0.1% to 1% get labeled opinion leaders.
Then come the influential – more affluent and knowledgeable, between 1% and 10%. It is this sector that decides whether a new product is going to go mainstream or not. Malcolm Gladwell would term this “the tipping point.”
They provide the critical mass that causes the S-Curve acceleration and then, like a herd, the early majority adopt next. After the 50% adoption point the process slows down as finally… the late majority piles in.
From 90% forward things really slow down and we see the last to jump on board with the laggards and, finally, the die-hards…
Once that happens, demand shrivels up and declines.
These stages are predictable.
But most people don’t see that.
That’s the time frame of any investment– a short-term cycle for traders, or long-term bull and bear markets for investors. Like anything else, the early-birds get the worm and the latecomers pay higher prices and face greater risk.
And when the party begins winding down, who gets out first? Yup, it’s the same order all over again.
That’s a thought crossing most investors’ minds: “How can I always be the last person to get in before the market falls?” Though it may feel like that, the truth is that you have a lot of company since most people get in on the late side.
And the converse is true as well; the late-comers are also late to get out as they wait hoping to get back to even.
But here’s the worst thing about it, and this is downright sinister. The smart money, the big boys, the most adept traders… are watching you and all investors.
They watch the balance of buy orders and stop losses in order to know when the masses have piled in, like you, and then they short the market… and then they buy when everyone has panicked out. They have both the disposition and tools to do this that you don’t.
It should be obvious that if even longer-term investors greatly under-perform in good times, they would do worse in extended bad times like this winter season and even worse than that if they try to become shorter-term traders on their own.
I tell aspiring E-traders not to open that $50,000 account as they’ll lose it trading – unless they’re unusually gifted. You are a minnow swimming in a shark tank. You would be better off giving that $50,000 to charity and getting a 50% tax deduction!
My team’s Chief Investment Strategist and Editor of Cycle 9 Alert, Adam O’Dell, is one of these unusually gifted people with a unique system different from even the most seasoned traders out there. You can’t beat “the Street” without such a system to harnrness the emotions that kill most investors – and Adam’s constantly refining that methodology to hone in on even better trades.
In these increasingly volatile times – and my longer-term perspective is crystal clear that they are going to get much worse, sooner rather than later – you should have some portion of your portfolio positioned with a system like Cycle 9 Alert and the remainder in safer-than-normal areas.
That’s where understanding your risk tolerance comes in: how much can you afford to put in a higher-returnrn system vs. how much does it take for you to be secure, sleep at night and stick with that system?
These are questions that all of us need to answer, but with someone like Adam on your side, it makes the process all the easier to bear.
P.S. This Thursday at 4 p.m. EST, Adam will be explaining his systematic approach to the markets in a free, live event called, Why Most Investors Suck Wind (And How to Guarantee YOU Don’t!). With a 68% win-rate for his Cycle 9 Alert service, Adam’s approach to investing is well worth your time to tune in and listen to. If you’d like to maximize your gains while minimizing your risk, sign up now for Adam’s special presentation.