You can boost stock market returns by avoiding typical behaviour patterns.
Since the 1960s one grand theory has dominated investors’ views of how stock markets work. The efficient market hypothesis asserts that prices accurately reflect available information and investors behave rationally. It’s an elegant idea and leads to the conclusion that it is not generally possible to beat the market except through luck or inside information.
However, it doesn’t accurately reflect the world at all times. Therefore it can be argued that is it not particularly useful for the poor investor trying to get a handle on markets. Which is why, over recent years, a second theory has been grabbing attention. This theory, called behavioural finance, accepts that markets are not always rational but it rejects the idea that they are completely random. Although behavioural finance initially was treated with scepticism in the City, it is now playing an increasing role in investment decision-making. Bringing insights from psychology to the world of finance, it asserts that a lot of investment behaviour is based on irrational decision-making, driven by emotion rather than logic. By understanding how average investors behave and the mistakes they make, you can learn how to avoid them. ......
......Leave the herd behind and get ahead
One of the key tenets of behavioural finance is that investors follow the herd, although chasing the latest fad often ends in disaster. ......
...... So if you want to try to overcome your herd instincts, what should you be investing in now? Alan Steel of Alan Steel Asset Management, says: “The contrarian would shun property investments and gilts in favour of equities.
“Even though stock markets have soared in the past 12 months, sentiment is still very depressed about the future prospects of both equities and the global economy. Buying shares is still a contrarian stance.”
Quote courtesy of The Times
Saturday 13 March 2010
