Survey Of Retail Investors Shows The Blind Lead The Blind

In retail investing, do the “blind lead the blind?” Such was a question I asked recently about young investors who are “Long Confidence And Short Experience.” However, a recent survey by MagnifyMoney dug much deeper into the subject.

Our previous article’s gist is that throughout history, markets have a way of separating investors from their money. Such is the reason every great investor in history has one rule in common: “Don’t lose money.” The reason, of course, is that if you lose your capital, you are “out of the game.”

As I noted, the market’s current speculative behavior is not uncommon throughout history.

“Bubbles are characterized by extreme predictions, tend to dominate conversations and induce people to leave their jobs. The warnings of bubble skeptics get invariably met with scorn and derision.” – William Bernstein

Today, more individuals are searching “google” for how to “trade stocks” than at any point in history. (If data was available back to 1999, I am sure it would be similar.)

retail investing blind, Survey Of Retail Investors Shows The Blind Lead The Blind.

Of course, this overconfidence grew from the repeated Federal Reserve interventions. Those interventions lofted asset prices and speculative confidence. Not surprisingly, as noted by CNBC:

“Young retail investors plan to spend almost half of their stimulus checks on stocks, Deutsche survey claims.”

 

Over-Confident

Every year, Dalbar Research does a study of retail investors. The latest study revealed retail investors tend to underperform markets due to a series of “behavioral biases.”

retail investing blind, Survey Of Retail Investors Shows The Blind Lead The Blind.

As the study showed, the biases lead equity investors to do worse than the index consistently.

retail investing blind, Survey Of Retail Investors Shows The Blind Lead The Blind.

Such is due primarily to the psychological pitfalls that occur from “herding” to “confirmation bias.” 

“When discussing investor behavior it is helpful to first understand the specific thoughts and actions that lead to poor decision-making. Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance.” – Dalbar

Of course, since individuals don’t operate in a vacuum, where is the information coming from that promulgates these emotionally driven actions?

Blind Leading The Blind

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