Posts from — February 2009

When the economy is doing poorly, it is often the case that people start acting irrationally when it comes to their finances. The best evidence of this is the scores of people who have sold off their investments in the past months – the investments they worked so hard to shore up for years.

One of the biggest reasons for poor investment decisions as of late is due to unmet expectations. People expect their investments to go up, up and up.  When they don’t, lots of little doubts begin to creep in.

“Do I have too much invested in the market?”

“Am I just invested in the wrong companies?”

“Will the market ever come back…and if so will it be too late for me?”

Much of these unmet expectations come from a single source. The holy grail of stock market statistics that has been preached by advisers and professors for ages as the ultimate reason to invest in the stock market:

The average return of the stock market is 10%

The thing about this statistic is that many people zone in on the “10%” aspect and completely ignore or minimize the word “average”.
The word “average” should emphasize the long-term nature of investing, but to most it’s more like the warning sign for a roller coaster – “yeah, yeah, yeah, we get it, just let us on the ride!”

This is why I love following presentation by Carl Richards of Behavior Gap that I found on Ramit Sethi’s blog this afternoon. It shows the fundamental flaw in most of our thinking when it comes to associating average with normal. Here it is:

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A C-17 taking off from a remote location in Afghanistan. He’ll level off approx. 300 feet AGL (above ground level), accelerate and then pull up hard to anywhere from 30-50 degrees nose high. This is why I love my job!

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