In the current investment environment, the old way of thinking may do more harm than good. Exchange traded fund investors need to have a strategy in place before dipping into these choppy market waters.
Investors tend to deviate from a rational thought process but there are ways to reduce the influence of the errors, writes Samuel Lee for Morningstar’s latest monthly ETF newsletter.
“Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ,” investment guru Warren Buffet famously said. “What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
Investors as a whole tend to be overconfident. Studies on active managers show that they have a hard time outperforming the benchmarks while retail investors usually underperform the overall market on a risk-adjusted basis before trading costs.
“Your chances of being a truly skilled investor aren’t 50% (the fraction that’s above average in the famous normal distribution, or bell curve) but closer to one out of 100,” Lee says.