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Sure we all know of Warren Buffet, the “Oracle of Omaha” and perhaps others such as Benjamin Graham, George Soros, or, someone every index investor should owe a deep debt of gratitude to, Jack Bogle (who founded the Vanguard Investing Group).
True these investors are definitely far superior to the average investor dipping his or her toes in the market.
But that is not the investor I was talking about in the title of this post.
No this investor will most likely not have a recognizable name in the media.
There are no Investment Firms or Banks bearing his or her name.
But there are numerous research studies that have shown that this investor consistently beats the average Joe investor.
Is there some inside information this particular investor has that is not available to the general public?
Does this investor spend all his or her day perusing financial blogs, absorbing financial news from all sources of media to be armed with the appropriate knowledge necessary to beat the average investor?
The answer to both is a resounding no.
The only criteria that sets this investor apart from the average investor is this: He or she is dead.
That’s right.
The odds are that there are numerous deceased individuals who have investment accounts that have returns surpassing those individuals who frequently trade.
Why is that?
It is not that these investors happened to pick the right stocks at the right time and let it ride.
Fidelity did a study reviewing how various portfolios performed and found that the best ones were owned by individuals that were deceased and the second best group were by individuals who actually forgot that they had an account.
Now I am not suggesting that to boost your investment returns you should promptly die.
But an important take-home point would be to have the mentality of the dead or individuals who forgot they had accounts.
You have to recognize and then fight the ingrained responses a typical investor has:
- The Fear of Missing Out (FOMO):
- This can be a huge detriment to your overall investment performance.
- When you have “financial gurus” screaming at you on your TV and the internet and financial outlets providing examples of individuals rapidly increasing their wealth (the recent Bitcoin rage is a wonderful example), there is a basic instinct to buy in as well, otherwise you may be left behind.
- By the time the information disseminates to you it is likely too late.
- The prices have already been driven high and you are setting yourself up for buying high and, further down the road, selling low.
- This is the opposite of the good investor mantra (Buy Low, Sell High).
- I am definitely not immune to this phenomena and a good example of that is the office lottery pool.
I do not typically go out and buy lottery tickets or scratch-offs (even though sometimes I am tempted after watching shows like “How Lottery Changed My Life” or “My Lottery Home”)- However whenever the office pool for a lottery comes in I will definitely “buy a share”
- It is not the thought of winning that drives this contribution.
- Rather, it is the thought of not contributing and by some stroke of luck my co-workers win.
- That scenario would probably eat away at me more than anything else because I would second guess that decision for the remainder of my life.
- It is not the thought of winning that drives this contribution.
- The Fear of Being Stuck Holding the Bag:
- When there is a downturn in the market and stock prices are plummeting, there is an intense desire to “cut bait” and not be subject to further losses.
- By selling an asset, an investor essentially “locks in” that loss converting it from a paper loss to a true loss.
- This typical investor behavior can be self-fulfilling prophecy as people start dumping shares, driving the prices down further, and sometimes below true market valuation.
- It takes nerves of steel to hold, and even more to buy, a rapidly declining asset. But this is indeed how the real money is made.
- When there is a downturn in the market and stock prices are plummeting, there is an intense desire to “cut bait” and not be subject to further losses.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”-Warren Buffet
- There is still a risk of “Catching A Falling Knife” implying putting in good money after bad can be detrimental.
- However with broad market index funds this scenario is negligible as throughout history the markets have always recovered and progressed in an upward trend.
So if you can resist these basic urges much like the deceased or forgetful investor, typically your patience will reward you.
For Every Pin an angel gets his or her wings (and it is appreciated by Xryavsn)
Superpower Take-Home Points:
- Investor behavior is typically detrimental to a portfolio explaining why often the best performing investors are deceased or forgetful.
- Recognizing harmful investor behaviors and shunning external/media influences can help counteract these harmful tendencies.
Note:
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I read that the other day and it didn’t surprise me at all. And also dead people sometimes vote in elections too ?
Yeah those dead people sure are active in some ways but wisely not in churning their financial accounts. Lol. Thanks for stopping by
I’m a buy and hold investor of real estate and index funds. Just let time do its thing. The only time I sell is to rebalance the portfolio.
That is the best course of action in my opinion. I too only rebalance when it gets out of my % band for each asset class and in fact just pulled the trigger to do so a couple of weeks ago.
So what you’re saying is if a boulder is rolling down the hill toward you picking up speed, don’t move and let it run you over? How about if you stepped 5 feet to the left and let it roll by? Does that make sense? You can always move 5 feet right after the boulder passes. Why is it dead people do so well? It’s because they don’t experience sequence of return risk. A closed portfolio does not experience SORR. It’s when you start drawing money your goose gets cooked. In accumulation you have a job, a W2 to paper… Read more »
That is good point about a closed portfolio being successful because of lack of SORR. The dead man’s portfolio would behave like your lifeboat portfolio you suggested in your previous guest post. Definitely hard to compare apples to apples when one has to withdraw and one just lets it ride.
Gasem, you make great sophisticated points, I generally agree with much of them and I too will be facing potential SORR in 1.5 years. But at what point exactly does one ‘see a stock market crash likely…’? Is it at some point, e,g., at the end of 2013 after 5 years of a strong bull market and a rising Schiller CAPE? – but then one would have missed out on 4 more really good years (except 2015, meh). What formula tells one when to shift from ’60/40 to 40/60′? Rhetorical questions obviously, just that I think, depending on the parameters… Read more »
There aren’t any “easy signs” or rote formula. I use a study of the historical efficient frontier from here: https://www.portfoliovisualizer.com/. If you put in a simple 2 fund portfolio like VSTMX VBMFX the calculator will draw a curve. The plane on which the curve lives is a risk/reward plane and the curve is the most reward for the least risk curve. When you fall off the curve you are paying for your reward with too much risk and therefore your investment is inefficient and relatively speaking you are loosing money to excess risk. You can choose any AA you like,… Read more »
What an excellent discussion Gasem. It is worthy of a post in of itself and not regulated to a comment. Thanks for answering another readers query
XRAY: and you thought I’d never write you another article Cheers
I too am guilty of fOMO when it comes to the lottery. The only time I play is when the office does. Because it would absolutely suck if the office pool wins and I didn’t play. And it has happened. So, trust me you are not alone.
Thanks,
Miriam
LOL. Thanks Miriam for supporting my thoughts on the office pool lottery. Yeah I have watched the HGTV shows How the Lottery Changed My Life and there was one episode where I believe there were 8 or so garbage men that won a huge jackpot (surprisingly one continued to work) and there was just hate from the other workers who didn’t participate (and I’m not sure if this was the one or if it was another similar situation but someone also sued saying that they usually participate (but somehow didn’t this time) and should be entitled to some of the… Read more »
Clever.
And True.
One of the most successful investors I knew was an absent-minded professor. He knew nothing about investing and couldn’t care less about it. He had a chunk of his paycheck go to his TIAA-CREF account at the university. He completely ignored the account balance for decades. At retirement, he asked if he had any money in the account. He was surprised to learn he was a multi-millionaire with the largest balance of any of the professors – even more than the professors of economics and business.
Wow. That is a phenomenal anecdote and really shows the power of just investing and not worrying about the small stuff. Thanks for the great story!
what was his asset allocation?
I don’t know the exact details but mostly a low-cost stock index fund. He was lucky it was TIAA-CREF. They looked out for his interest. Many physicians shouldn’t delegate and ignore what their “helpful advisors” do for them.
TIAA-CREF hmmm Biggest kid on the block hmmm kind of speaks against the old saw of you can’t beat the low cost DIY indexing BH3 philosophy.
I have read that when people don’t realize or remember they have investment accounts, they often do very well for many years. However, once they remember the accounts and start trading, the accounts will often go down. Good post XRV.
Thanks volunteer pediatrician. That is why a lot of people advise not even looking at your 401k statements. Just store the envelopes away. Do that for a couple of decades and continue to steadily contribute and you will be shocked by the time you see it. I personally do check and make sure things are not out of whack and rebalance occasionally but it shows that the most important thing is you are contributing