Here’s why ‘dead’ investors outperform the living

Investors who adopt a “buy and hold” strategy, often referred to as “dead” investors, tend to outperform those who are more active in trading. This passive approach leads to better returns as it avoids the higher costs and taxes associated with frequent trading. According to experts, the emotional and impulsive decision-making that comes with active trading is a major hindrance to investor returns.

Brad Klontz, a certified financial planner and financial psychologist, emphasized that human behavior poses the biggest threat to investor returns. Making decisions based on panic or excitement can lead to poor outcomes. Klontz highlighted how inactive investors tend to fare better than those who are constantly buying and selling securities.

One of the main reasons why “dead” investors tend to perform well is because they ride out market fluctuations without making knee-jerk reactions. Stocks have historically rebounded after downturns and reached new highs, showcasing the benefits of a long-term approach.

Data from DALBAR shows that the average investor lagged behind the S&P 500 index by 5.5 percentage points in 2023. Similarly, Morningstar found that the average U.S. mutual fund and exchange-traded fund investor earned 6.3% per year from 2014 to 2023, while the average fund had a 7.3% total return over the same period. These statistics highlight the impact of poor timing and emotional trading on investor returns.

Experts explain that human evolution plays a role in investors’ tendency to follow the crowd and make emotional decisions. Market movements can trigger a fight-or-flight response, leading to irrational behavior. Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management, noted that our intuition is often at odds with successful investing strategies.

While the “buy and hold” approach doesn’t mean doing nothing, it does involve maintaining a consistent investment strategy over time. Financial advisors recommend reviewing asset allocation, rebalancing periodically, and considering automated options like balanced funds or target-date funds. These funds can handle tasks like rebalancing and require less active involvement from investors.

Automating saving and investing, such as contributing to a 401(k) plan, can help investors stay on track without being swayed by market volatility. Experts advise against excessive trading and emphasize the benefits of a disciplined, long-term approach to investing. By avoiding emotional decisions and focusing on a well-thought-out strategy, investors can improve their chances of achieving their financial goals. The world is a diverse place, filled with different cultures, languages, and traditions. Each country has its own unique way of life, and this is what makes traveling so exciting and eye-opening. One country that stands out for its rich history and vibrant culture is Japan.

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