The Average Person Is Absolutely Horrible At Investing

Just how bad is the average investor at investing?

According to BlackRock’s chart below, they’re so bad that they’ve managed to underperform every major asset class for the last 20 years. They’ve even underperformed inflation.

Volatility is often the catalyst for poor decisions at inopportune times. Amidst difficult financial times, emotional instincts often drive investors to take actions that make no rational sense but make perfect emotional sense. Psychological factors such as fear often translate into poor timing of buys and sells. Though portfolio managers expend enormous efforts making investment decisions, investors often give up these extra percentage points in poorly timed decisions. As a result, the average investor underperformed most asset classes over the past 20 years. Investors even underperformed inflation by 0.5%.

How can that be? It all boils down to a foolish belief that we can time the market.

Or, as BlackRock says, “Amidst difficult financial times, emotional instincts often drive investors to take actions that make no rational sense but make perfect emotional sense. Psychological factors such as fear often translate into poor timing of buys and sells.”

Source: http://www.businessinsider.com/chart-average-investor-returns-2012-12#ixzz2NF7TIZLq

S&P 500 – Is Consolidation Round the Corner?

I read this commentary from DNA Decoder:

Something to watch in the coming weeks

History does not repeat itself, but it does rhyme – Mark Twain

If 2013 offers us enough similarities to 2012, a consolidation period might not be too far away. Only time will tell. The image below shows the S&P 500, SMA20, SMA10, RSI(14) and the Aroon.

(click to enlarge)

Image created at stockcharts.com

Some bearish observations about the chart:

1. The SMA10 crossed the SMA20 in the most recent market drop into the sub 1500 zone. This didn’t happen in the late December drop.
2. Volume decreased while the market went up during last week.
3. Up to this point, the RSI seems to be forming a bearish divergence that started in late January.
4. It’s possible that we may be riding the 5th impulsive wave of an Elliott wave set that started on November 2012.

It will be interesting to keep watching the market and see how the next weeks unfold.

S&P 500 on Record High

The Dow Jones Industrial Average rose 42.47 points, or 0.3%, Wednesday to close at 14,296.24, a new record. The Dow is up 1.72% in the past four days, and has risen 9.1% in 2013.

Dow Jones Index

If retail investors are entering the stock market now because they believe a technical barrier has been crossed by virtue of the Dow Industrial Average breaking out to new all-time highs as of two days ago, it is likely that they could be very disappointed. This is due to the fact that many of the flows of broader indicators are not confirming a broad-based stock rally.

Similarly, the Standard & Poor’s 500 index gained 0.11% to close at 1,541.46, its highest close since Oct. 31, 2007. The index is now just 1.5% off its record close of 1,565.15, hit on Oct. 9, 2007.

However, the thin volume speaks of a lack of conviction.

Conclusion: Given the fact that retail investors are generally the last leg of a bull-market rally, it would appear to be a wise move to sell into this rally and watch for a roll-over to the downside in U.S. stock indexes. At that point, I would look at shorting the U.S. Stock Index’s expecting a 10%+ correction, given the length and breadth of this bull-market run.