CHICAGO, May 15 (Reuters) – Is the Dow’s movement above
15,000 or the record close of the S&P 500 Index last week a buy
signal? They may not mean anything, but most market watchers
believe the rise is talismanic.
Despite the lure of recent market gains, there’s often no
pattern to investment results. To avoid seeing patterns where
there may be none – and acting irrationally – we often need to
short-circuit our instincts and think counter-intuitively.
A go-slow approach that avoids trading on market timing can
often avert losses. Here are some behavioral biases and ways to
prevent bad decisions:
1. Don’t time jumps in and out of the market.
Trading decisions typically are expensive and eat into your
A study released late last year by the Gerstein Fisher
research center found that the S&P 500 posted a 6.66 percent
annualized return from Jan. 1, 1996, through Dec. 31, 2010.
After trading, inflation, fund expenses and taxes, however,
individuals reaped a miserable 1 percent return. Investors paid
a steep penalty for market timing.
2. Buy and hold works.
We tend to be overconfident in our ability to predict the
Let’s say you held a basket of small-company stocks from
1993 through last year. You would have reaped an 11 percent
compound annual return, according to Ibbotson Associates. If you
were in large stocks, your gain would have been about 8 percent
on average annually if you held your position for 20 years
through 2011, according to Dalbar, a Boston-based financial