Don't Blame Yourself

05/25/2011 02:50 pm ET
  • Dan Solin Author of the Smartest series of books

If you're like many investors, you got clobbered when the markets crashed in 2008. You may have "fled to safety," following the advice of your broker and the financial media. You probably didn't engage in tax loss harvesting because your broker never heard of it.

If you sat out the market recovery in 2009 and received interest of 1% or less on your cash, you're in bad shape.

Sound familiar?

Don't blame yourself. A recent presentation by Scott A. Bosworth, Vice President of Dimensional Fund Advisors, puts your behavior in perspective.

Investors love to flagellate themselves. In retrospect, the crash of 2008 seems so predictable. After all, wasn't the housing bubble just waiting to burst? Having convinced themselves they were stupid in not seeing the obvious in the past, investors conclude the future will be easier to predict. They could not be more wrong.

Investors find it very difficult to accept that markets are random and unpredictable. When they buy a stock and it goes up, they congratulate themselves on their investing acumen. Actually, they were just lucky. When they pick a loser, they comfort themselves with thoughts like "Who could have imagined this would happen to that stock?"

With winners or losers, the distorted reasoning is the same: All of this is somehow within my control.

Investors mistakenly believe they can control picking stock winners, picking superior mutual fund managers and timing the markets. The financial media and most brokers and advisers encourage these false beliefs.

As Bosworth points out, all investors can control is keeping their expenses low, diversifying their portfolio, minimizing taxes and adopting a disciplined approach to investing.

You need to stop hanging on to things you can't control and to focus on those factors you can.

The first step is to ignore the advice of brokers and advisers whose economic interest is well-served by fostering ill-founded beliefs about investing.

Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.

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