Behavioral Finance: Remaining Disciplined Any solid investment plan will only work if it is adhered to during varying market environments. In the face of market turmoil, some investors may find themselves tested, making impulsive decisions that go against their investment plan. Although markets have rewarded discipline, humans are unfortunately not wired for disciplined investing.
Behavioral Finance: Recognizing Our Biases People struggle to separate their emotions from their investment decisions. Following a reactive cycle of excessive optimism and fear may lead to poor decisions at the worst times. Investors are much better off investing with discipline for the long term, rather than trying to speculate the market in the short term.
The Stupidest Thing You Can Do With Your Money From this recent episode of Freaknomics Radio–A study found that only the top 2 to 3 percent of active-fund managers had enough skill to cover their cost. It’s hard enough to save for a house, tuition, or retirement. So why are we willing to pay big fees for subpar investment returns?
Measuring Chance: Luck versus skill in mutual fund performance From Chicago Booth Review (May 01, 2012): Managers of active funds aim to outperform the stock market by picking what they think are the hottest stocks. When these managers succeed in beating the market, it may seem to investors that this is a sure sign of talent. But according to a recent study by Chicago Booth professor Eugene F. Fama and Kenneth R. French of Dartmouth College, it is impossible to tell whether an active fund manager’s stellar performance is due to skill or just sheer luck. In fact, Fama and French show that most active fund managers do not do better than would be expected by chance.
The Free Dividend Fallacy From Chicago Booth Review (March 06, 2017): Dividends are not free money (though lots of investors seem to think they are). In a yield-starved economy, many stock investors look to cash dividends as a source of income. Yet retail and professional investors alike misunderstand the value and role of dividends, leading to suboptimal portfolios and market distortions, research suggests.
The added value of financial advisors. Recent Vanguard research shows that your advisor not only adds peace of mind, but also may add about 3 percentage points of value in net portfolio returns over time (2014).