Investors assume that they behave rationally when making buying and selling decisions. After all, they spend a great deal of time studying the pros and cons of every investment decision which they make. Behavioral economics shows that this is not the case. Emotional, psychological, social and other factors influence our economic decisions, much of the time to our detriment. We get in and out of stocks when really, we should buy and hold. More than a decade ago, a study of over 66,000 accounts at large discount broker showed that during the five-year period from 1991 to 1996, the accounts that traded the most frequently earned 11.4 percent. The rate of inflation at that time was 1.12%; the investors who traded frequently could feel good about their results.
During that period, the market returned 17.9 percent!
In other words, the most useful activity for portfolio growth at that time was to sit in your rocking chair. Do you think that it is any different today?