Roth: Why Investors Repeat Mistakes

February 26, 2014

Investors claim to understand how they blundered; why do they blunder again?

As investors, we think we learn from our mistakes, but far too often we don’t. Here’s an example.

An investor contacted me looking for help. He was mostly in cash and confessed that he panicked and sold after the stock plunge in 2008 and missed the run-up that began in 2009 that took stocks far higher than the pre-crash levels, as shown below.


The investor told me he’d learned an expensive and important lesson: He was not smarter than the market.

Funds flowed out of stock mutual funds and ETFs through 2012 and only started flowing back into stocks in 2013, after they’d hit an all-time high. He vowed he would never make that same mistake again.

I then went on to describe my philosophy of picking an asset allocation of stocks and bonds and sticking to it no matter what. I noted that this rebalancing meant selling stocks as the real estate bubble heated up though 2007, and buying stocks in 2008 and early 2009, when capitalism was supposedly dead.

What the man said next shocked me, though it shouldn’t have.

He said: “I’m with you on stocks, but I’m not going to buy bonds now.” When I asked why, he responded, “Because rates are at historic lows and have to go up.” In my typically tactless way, I asked, “So you learned you weren’t smarter than the stock market, but still think you’re smarter than the bond market?”

The call terminated shortly afterward, but not before I got in a comment that the top economists listed in The Wall Street Journal surveys have correctly forecasted the direction of interest rates far below 50 percent, the expected accuracy of a coin flip.


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