In short, we are simply not wired for the required risk analysis inherent in investing.
Chances are every investor has confronted this on at least some level ranging from self doubt on a particular trade to ongoing self awareness to continually address and mitigate the deficits Barry spelled out in his post and maybe ones not included.
The starting point might be in the stock market's average annual return. It used to be around 10% annualized but has come down a couple of points over the last decade or so. Whatever the average annual return, it includes feast, famine, bust and boom. Proper asset allocation and an adequate savings rate can get the job done, of course a little luck helps too.
The work any investor does beyond buying a broad index will either make it a little better, a little worse, a lot better or a lot worse. A lot worse probably happens a disproportionate amount of the time for all the reasons Barry mentions. People get greedy sometimes, fearful other times, are prone to repeat past destructive behaviors, forget that much of what is happening today (in terms of market action) has happened before and will happen again.
The S&P 500 cut in half a few years ago and based on comments on this blog and elsewhere it seemed as though many people had forgotten that this had just happened just a few years earlier. The market recovered from cutting in half 12 years ago and will recover from doing do in 2008-09 with the variable being how long it takes. This is about market behavior and is a building block for navigating market cycles.
This is a long winded way of saying markets work. Each person believes that or they don't--I do. It might be better to say markets work if you let them. Everyone comes at this differently but a lot of trading is not really letting markets work for you. More likely people who trade frequently are working the markets which is a tougher proposition and hopefully the market is not working them but of course that happens too.
Also in line with letting the market work for you (you knew this was coming, right?) is heeding when the market warns that risk of a large decline is heightened. This speaks to smoothing out the ride that you go on in your investing lifetime which circles back to cognitive deficits. Panic is a cognitive deficit and panic can be avoided if the portfolio doesn't go down as much as the market the next time something like 2008 comes along. You get there by having a trigger point for defensive action that you have some basis to believe will work and to which you can be disciplined.
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