Why is investing so difficult?
Many people find that after some failed attempts at investing they make the decision to give up and turn their funds over to a professional investment manager. This is even though the performance of the professionals is poor, with more than 70% of fund managers underperforming their benchmark over a five-year period.
By contrast, the small investor has the advantage that he/she can move quickly, invest in small cap stocks which potentially provide much higher returns and can avoid being invested during a bear market. So potentially the small investors can do better than most professionals so why do so many small investors fail? There are three things that prevent the novice investor from succeeding
Lack of planning. Surveys show that about 70% of investor have no investment plan. The first essential is to have a plan which when implemented provides not only the roadmap but also the discipline necessary for successful investing.
Risk and volatility. Investors fail to understand and manage volatility and risk. Failure to recognise and manage risk is the most significant reason for investor failure.
Psychology. The role of psychology in investing is poorly understood by most investors. Homo sapiens is poorly equipped to invest because we are so vulnerable to the emotions, greed, fear and hope.
It all comes down to investor education. Australians are at a real disadvantage because our education system does not prepare us as investors and we must learn how to invest later in life. Of course, we are busy raising families and then we become pre-occupied with business and/or professions so it is usually not until their late 50s or 60s that most Australians start to learn to invest.
Let’s face it, it takes time to learn to invest. Some say it takes 20 years. There is a lot to learn not least of which is how to overcome those issues of psychology. Investor education has a long way to go in Australia.