The Top 10 Investor Errors Explained

Posted by Barry Ritholtz: The Big Picture

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1. Neglecting the Long Cycle


Societies, economies and markets all move in long secular eras. Sometimes these periods are positive (i.e., 1946-66; 1982-2000) and are called secular bull markets. Sometimes they are negative (1966-82; 2000-?) and are called secular bear markets.

Let’s use 1982-2000 era as an example. The rise of technology – everything from software to semiconductors, mobile to networking, storage to biotech et. al. drove the broader economy. This led to record low unemployment, strong wage gains and high corporate profits. As you would imagine, stocks did exceedingly well in this environment. Asset allocations that were Equity-heavy did much better than those that carried lots of bonds and cash in that period. Conversely, the cycle that began in 2000 has rewarded bond and cash heavy portfolios and punished more equity-heavy ones.

Think about the many long-lasting positive elements that drove the post WW2 period (1946-66). You can list all of the negative societal factors that were a drag on the next secular bear period (1966-82).

Not understanding this cyclical backdrop is a common error. You should be more equity oriented during secular bull cycles and more tactical (i.e. bond and cash)  during secular bear cycles.

It is an investor’s job to preserve capital and manage risk during secular bear markets. During secular bull markets, maximizing returns are the top priority.

All investors need to understand what the secular backdrop is and adjust their allocations accordingly.



Chart Source: Source: Crestmont Research

Click on each Title below for an expanded explanation



4. You Are Your Own Worst Enemy

5. Asset Allocation vs Stock Picking

6. Passive vs Active Management

7. Mutual Fund vs ETFs

8. Cognitive Deficits

9. Past Performance vs Future Results

10. Not Getting What You Pay FOR



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