The hardest part of investing can be learning when to get out of your own way.
As human beings, we are emotional, impressionable, and often a lot less savvy when it comes to investing than we think. That can spell disaster for portfolios.
After the fallout of the Great Recession, the SEC commissioned the Library of Congress to research "Behavioral Patterns and Pitfalls of U.S. Investors," a study that shines a harsh light on the shortcomings of individual investors.
Using sources from this and other reports, we've highlighted the pitfalls.
Selling winners and holding onto losers
Researchers call it the "Disposition Effect"–– when foolhardy investors sell off 'winning' stocks in their portfolio to lock in gains and hang tight to losers in hopes that they'll bounce back in the future.
In a study of 10,000 trading accounts at discount brokerage firms, “Trading Is Hazardous to Your Wealth,"University of California business professor Terrence Odean found this method almost always had the opposite of its intended effect.
Once sold, the winning stocks went on to outperform whatever gains were earned by the losing stocks that the investor kept behind in his portfolio.
Ignoring fees when signing up for mutual funds
An August report by S&P Indices found more than 80 percent of actively managed U.S. stock funds underperformed the market in 2011.
Why, you ask? Fees.
The average mutual fund charges up to 3 percent of annual returns for the privilege of divvying up your investments, according to Forbes, which means they've got to promise returns of at least that amount for investors to break even.
"More often than not, a majority of funds underperform because returns are reduced by investment fees to cover fund operations, including costs to pay managers and analysts who support them," writes the AP's Mark Jewel. "Those fees are difficult to offset, even if a manager is a strong stock-picker."
Furthermore, the SEC cites a study by former Univ. of Southern California professor Mark M. Carhart, who found "no evidence that portfolio managers are particularly skilled or informed, characteristics that would justify additional fees."
Trading too much
In an article published in The Journal of Finance and cited in the SEC's report, researchers found some pretty intriguing facts about investors who treat the market like an arcade.
Of more than 66,000 households using a large discount broker in the mid-1990s, those who traded most often (48 or more times a year) saw annual gains of 11.4 percent, while the market saw 17.9 percent gains.
See the rest of the story at Business Insider
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