Thursday, 1 February 2007

Seven Deadly Sins of Investors - 5 Stars

This six page paper (The 7 Deadly Sins of Investors), written by Irish university business researchers Michael Dowling and Brian Lucey in a non-academic and very readable style, deals with the psychological mistakes that we individual investors are prone to make. And sure enough I recognized myself in there under the sin of Anger (aka non-diversification). As the authors point out, diversification means not just one's stocks and bonds, it should be taken very broadly to include employment, pension, a house etc. I can vouch from my experience working for Nortel in the good old John Roth days, it is a bad idea, as the authors say, to have pension investment in the company where one is employed (when I reach 65, I can claim a pension of around $2.17 per month from my four and a half years at the company - ouch!). In March 2000, the very peak of the dotcom boom, I said to my wife something like "if I sold all my (tech stocks) now, it would be enough to retire and live on reasonably well" and she replied "why don't you?" Yes indeed, why didn't I?

Here's a little snip that gives a flavour of the paper:
The investors who trade too much, who don’t diversify, and who follow the crowd, are doomed to repeat the mistakes of earlier investors. Good investors don’t necessarily have to do much to be successful.

Though I've read this kind of advice before, it is handy to be reminded about it since the toughest thing to do is alter one's own behaviour! I can't show it to my wife though because it says women are better investors than men, ahem.

There are lots of references to the real academic research that prove the points for anyone who wants to get to the original source.

1 comment:

Ottawa Guy said...

thanks for the reminder! it' easy to forget to stay disciplined in investing

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