{"id":8498,"date":"2020-02-18T20:22:49","date_gmt":"2020-02-18T20:22:49","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8498"},"modified":"2022-02-26T13:06:46","modified_gmt":"2022-02-26T13:06:46","slug":"the-1-threat-to-long-term-returns","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/the-1-threat-to-long-term-returns\/","title":{"rendered":"The #1 Threat to Long-term Returns"},"content":{"rendered":"\n<p>One of the country\u2019s leading experts in behavioral finance\nis a Santa Clara University professor by the name of Dr. Meir Statman. Some\nreaders may recognize Dr. Statman\u2019s name right off the bat. He has published\nnumerous articles and books about investor psychology, and he has done\nextensive research on investment decision-making \u2013 detailing common errors,\nbiases, blind spots, and so on. His recent article titled \u201cThe Mental Mistakes\nthat Active Investors Make\u201d caught my attention.<sup>1<\/sup> <\/p>\n\n\n\n<p>I\u2019ll start with Dr. Statman\u2019s overarching conclusion: <em>investors are their own worst enemies<\/em>. Investors\nmake decisions at just the wrong times. Emotional responses get in the way of sound\njudgment. Fundamental analysis and a disciplined investment approach are tossed\nout the window at the first sign of scary volatility. Overconfidence gives way\nto shunning or ignoring risk. The list goes on.<\/p>\n\n\n\n<p>Why do investors continue making the same mistakes? But\nalso, why do everyday investors continue trying to invest on their own, in an\neffort to beat the market?<\/p>\n\n\n\n<p>______________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_2_17&amp;content=stock_market_outlook_report\">The Key to Managing Your Investments \u2013 Focus on the Fundamentals!<\/a><\/strong><br> <br> Instead of letting emotions, overconfidence or limited information force you to make hasty investment decisions, I recommend keeping your eye on critical economic indicators with our Stock Market Outlook Report.<br> <br> This report will provide you with our forecasts along with additional factors to consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>What Produces 2020 Optimism?<\/em><\/li><li><em>What role does the \u201cU.S. China trade war\u201d play in 2020?<\/em><\/li><li><em>What sectors\u00a0show the best opportunity?<\/em><\/li><li><em>What industries within those sectors most merit your attention?<\/em><\/li><li><em>Forecast for the S&amp;P<\/em><\/li><li><em>Small-cap vs. large-cap returns<\/em><\/li><li><em>And much more.\u00a0<\/em><\/li><\/ul>\n\n\n\n<p>If you\nhave $500,000 or more to invest and want to learn more about these forecasts,\nclick on the link below to get your free report today!<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_2_17&amp;content=stock_market_outlook_report\">IT&#8217;S FREE. Download the Just-Released\u00a0March 2020\u00a0Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_2_17&amp;content=stock_market_outlook_report\">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>______________________________________________________________________________<\/p>\n\n\n\n<p>Here are four mental mistakes that I think are among the\nbiggest threats to achieving attractive long-term returns.<\/p>\n\n\n\n<p><strong>1. Practice Doesn\u2019t\nMake Perfect<\/strong><\/p>\n\n\n\n<p>With many skills in life, the more you practice, the better\nyou get. If you\u2019ve played the piano 1,000 times, you\u2019ll almost certainly be\nbetter than a person who has played piano ten or even 100 times. <\/p>\n\n\n\n<p>Trading in the stock market is not like playing the piano. The\npiano is an instrument that doesn\u2019t change as you learn it, and it is not\ncompeting against you. The equity market, on the other hand, is constantly\nresponding to different factors, economic data, earnings reports, interest\nrates, and so on. There is also fierce competition in the market \u2013 there is\nalways someone on the other side of the trade, trying to be the winner. <\/p>\n\n\n\n<p>Trading too often makes an investor vulnerable to making\ndecisions on incomplete information, gut instincts, or emotional responses. For\nthese reasons, I would even argue that a high trading frequency <em>reduces <\/em>your likelihood of beating the\nmarket over long stretches of time. Practice doesn\u2019t make perfect.<\/p>\n\n\n\n<p><strong>2. Measuring\nPerformance Incorrectly, and Against the Wrong Benchmark<\/strong><\/p>\n\n\n\n<p>If an equity investor made a +15% return in 2019 and felt\nvery confident with that result, my first question would be: <em>what was your benchmark in 2019? <\/em>If the\nbenchmark was the S&amp;P 500 index, then +15% is not a very good return. The\nS&amp;P 500 was up +31.49% last year! <\/p>\n\n\n\n<p>Going even further, investors often fall into the trap of\nmeasuring performance against a benchmark <em>each\nyear<\/em>. But one good year is not necessarily the mark of a good investor. The\nbest active investors outperform their benchmarks over long stretches of time,\n10+ years or more.<\/p>\n\n\n\n<p>There\u2019s also the matter of individual investors failing to\ncorrectly measure their performance in a given year. Dr. Statman references a\nstudy of members of the American Association of Individual Investors, where participants\n\u201coverestimated their own investment returns by an average of 3.4% a year\nrelative to their actual returns.\u201d This study illuminates a classic case of\nconfirmation bias: investors want to believe they are superior managers, and therefore\ninflate returns to confirm their beliefs.<\/p>\n\n\n\n<p><strong>3. Overconfidence\nClouds Judgment<\/strong><\/p>\n\n\n\n<p>Have you ever bought a stock that went way up, and felt like\na genius afterward? Don\u2019t worry, that\u2019s part of every investor\u2019s story at some\npoint in their lives. The question is, are you able to check yourself in those situations,\nto avoid associating a few good trades with being a brilliant investor? <\/p>\n\n\n\n<p>Overconfidence tends to lead to more trading, which as I mentioned\nearlier, is a recipe for underperformance, in my view. Overconfidence also\ncauses investors to shun or outright ignore risk, since \u2018gut instinct\u2019\noutweighs fundamental research or a disciplined investment process. Too much\nconfidence in the investment process can create blind spots.<\/p>\n\n\n\n<p><strong>4. Faulty Strategies\nwith Limited Information<\/strong><\/p>\n\n\n\n<p>Self-directed investors often process decisions by only\nusing information that is already in their minds, or with information heard or\nread on the news. But that means making decisions on information that is incomplete\nor already priced into the market \u2013 or both. Similarly, investors often flock\nto stocks that are garnering a lot of attention in the media, a bad strategy\nthat needs no explanation in my view. <\/p>\n\n\n\n<p>Dr. Statman uses the \u201c52-week\u201d strategy as an example of an\nunproven method that many investors use, i.e., buying or selling a stock based\non whether it is at the low end or the high end of a 52-week average price. The\nproblem is, stocks are not beholden to these 52-week channels \u2013 there is\nnothing stopping them from shooting through a 52-week high or plunging much\nfurther below a 52-week low. Investors are trading faulty strategies with\nlimited information. <\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>A Fidelity survey of amateur investors \u2013 when asked why they\ntrade on their own \u2013 found that over 50% did it for \u201cthe thrill of the hunt,\u201d\nor because they enjoyed the challenge and enjoyed sharing news with friends and\nfamily.<sup>3<\/sup> But when asked if self-directed investors\u2019 goal in trading\nis to \u201csafeguard retirement,\u201d the affirmative responses go way down. Think\nabout that for a moment. <\/p>\n\n\n\n<p>Our aim here at Zacks Investment Management is applying our\ndisciplined, proprietary, repeatable, and notable investment decision-making\nprocess to deliver attractive long-term results to our clients. We strive to strip\nemotion out of our process completely, account for all of the biases above,\navoid them at all costs, and focus on the hard data. That\u2019s why many of our\nstrategies are top-ranked by Morningstar,<sup>4 <\/sup>why our focus is on\ndelivering attractive long-term results. In other words, we\u2019re all seeking to \u201csafeguard\nretirement,\u201d and no \u201cthrill of the hunt.\u201d<\/p>\n\n\n\n<p>So, instead of letting your emotions and a lack of information push you to make hasty investment decisions, I recommend staying focused on the long-term view, meaning focus on fundamentals instead of the daily price movements. To help you do this, I am offering all readers our\u00a0<strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_2_17&amp;content=stock_market_outlook_report\">Just-Released March 2020 Stock Market Outlook Report.\u00a0<\/a><\/strong><br> \u00a0<br> This Special Report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you&#8217;ll discover Zacks\u2019 view on:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>What Produces 2020 Optimism?<\/em><\/li><li><em>What role does the \u201cU.S. China trade war\u201d play in 2020?<\/em><\/li><li><em>What sectors\u00a0show the best opportunity?<\/em><\/li><li><em>What industries within those sectors most merit your attention?<\/em><\/li><li><em>Forecast for the S&amp;P<\/em><\/li><li><em>Small-cap vs. large-cap returns<\/em><\/li><li><em>And much more.\u00a0<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<sup>5<\/sup><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Investing is counterintuitive: Here are the most common mental mistakes investors make<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-8498","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8498","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=8498"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8498\/revisions"}],"predecessor-version":[{"id":10639,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8498\/revisions\/10639"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=8498"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=8498"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=8498"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}