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Psychology

To be a truly successful investor you must take emotion out of the buying and selling process.

From 1980-2005 the average equity mutual fund provided an average annual return of 10%, (the S&P 500 index fund provided an average annual return of 12.3%). Over the same time period, Individual investors (the people who actually bought & sold the stock mutual fund shares) earned 7.3% (not bad, but substantially less than the funds' recorded returns)

Q. Why the difference between the funds' average returns and the individual shareholders' returns?

A.
The mutual funds were "in the market" for the whole time period, the typical individual investor doesn't enter the market until it has already made gains— they buy when the market's good performance has hit the headlines and prices are high, and they sell when the market gets scary and prices are low. They let their emotions take over their decisions to buy and sell, and as a result their investment performance suffers.

Examine the two charts below, they clearly illustrate how individuals chase a hot market and buy when prices are high (denoted by net fund inflows), and sell when the market drops and prices fall (denoted by net fund outflows). Individuals who behave in this manner experience poor investment performance.

Fund_Cash_Flows_A__________________________________________________________________________________________________________

Fund_Cash_Flows_B

Don't chase performance, and don't abandon your investment plan when markets perform poorly!
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