Understanding Irrational Investor Behavior

Emotions are the driving force of the market

Irrational investor behavior plagues all of us, since we are indeed human. No one, not even the professionals, really know how and when markets will react to either bad or good news. Markets have, and will continue to be, driven by the emotions of investors. If you review the history of the US stock market and the major events which impacted the market, you’ll discover that most of the so-called market experts were wrong. No one body knows when markets will top or hit bottom.

According to DALBAR’s 2015 Quantitative Analysis of Investment Behavior (QAIB), the average mutual fund investor’s return in an Asset Allocation Fund over the last 20 years was a grim 2.47% compared to the S&P 500 Stock Index return of 9.85%, and Barclay’s Aggregate Bond Index return of 6.20%. You can attribute much of this difference to irrational investor behavior.

Substitute Emotions for a Rules Based Strategy

Therefore, we believe the effective way for managing your 401k account, or any investment portfolio, should be based on market facts and using a rules-driven strategy to make these tactical investment decisions.

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