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Market Myths Investors Can’t Seem to Shake

July 21, 2014

It’s notorious that amateur investors (like some of your clients?) are bundles of behavioral inconsistency. This makes them likelier to believe in myths that distort their sense of reality and harm their long-term financial prospects, writes MarketWatch.

The storylines they fall for can be general or specific, but like most mythologizing, they make “complex dynamic systems” seem more comprehensible to the untrained and inexperienced, according to the website.

Many investors, for instance, think the stock market can make them rich. While it “can protect your wealth and help you maintain purchasing power,” MarketWatch says it’s not where fortunes are generally made. The wealthiest people in the world got that way by “building and running fantastic companies,” not by “flipping stocks in their brokerage accounts.”

In a related narrative, some low-information investors really believe the one about “the simpleton from Omaha.” If a jackass like Warren Buffett can do it, then so can I, they figure. All it takes is a portfolio full of “value” stocks, right? Trouble is, “Buffett is not a simple value-stock picker.” MarketWatch writes. “What he has built is far more complex and resembles something that few retail investors can even come close to replicating.”

Investors also like to think they get what they pay for, a mindset that explains investors’ willingness to overlook the ugly mark that fees make on net investment performance. “In finance, more expensive doesn’t necessarily mean better,” the website says. “The investor who incurs greater fees, frictions and other inefficiencies will underperform the aggregate as well as a peer who incurs fewer of these frictions.”

Given their automatic genuflection to price tags, it may seem odd that amateur investors think the point of investing is to “beat” the market. But they do — and it’s a preoccupation that can lead them to take on more risk than they can handle. “You need to allocate assets in a manner consistent with your financial goals of beating inflation, without exposing your portfolio to disruptive levels of risk,” MarketWatch says. “Beating the market is probably not only unattainable for most, but likely to encounter disastrous financial turbulence along the way.”

By Thomas Coyle
  • To read the MarketWatch article cited in this story, click here.