The latest edition of Charles Ellis’ investment classic explores why people make terrible day traders

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The latest edition of Charles Ellis’ investment classic explores why people are terrible day traders

The fact that most fund managers underperform their benchmarks is well known, but for those not aware of how bad it is Ellis reminds us all in the first chapter: "Over one year, 70% of mutual funds underperform their chosen benchmarks; over 10 years, it gets worse: nearly 80% underperform. And 15 years later, even worse: the number is nearly 90%."Are you tempted to try to time the market, or day trade? Ellis advises against it.

Stock picking doesn't work, either. Not because those doing the picking are fools. Quite the opposite: "The problem is not that investment research is not done well," Ellis writes. "The problem is that research is done so very well by so many … it is very hard to gain and sustain a repetitive useful advantage over all the other investors on stock selection or price discovery.

Don't play it. Have a firm understanding of your own risk profile and stick, for the most part, with index funds that track the market. Sticking with a long-term strategy and not getting spooked by short-term fluctuations in the market is the hard part. Long-term investors care about a future stream of earnings and dividends, and how they are growing or shrinking. Short-term traders don't care about earnings or dividends; they care about investor psychology that can swing wildly from day to day and month to month.

Your zone of competence is the area you feel you have some skill. Not comfortable picking stocks or funds, or investment managers? Stay with index funds.

 

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