In his most recent column, The Wall Street Journal’s Jason Zweig explains that for every study suggesting that retail investors are the “dumb” money, there’s another that shows that, instead, it’s institutional investors who make the bad decisions.
When markets get turbulent, sometimes making fewer decisions is better than making the wrong ones. As Vanguard founder Jack Bogle suggested, “Don’t just do something, stand there.”
In his piece, Zweig references Nobel-prize-winning economist Robert Shiller’s paper, written with John Pound, called Survey Evidence on Diffusion of Interest Among Institutional Investors. Shiller and Pound used the survey to “elicit what fraction of [institutional] investors were unsystematic and allowed themselves to be influenced by word-of-mouth communications or other salient stimuli.”
Zweig notes that in response to the question, “My initial interest was the result of my, or someone else’s, systematic search over a large number of stocks (using a computerized or other similar search procedure) for a stock with certain characteristics, yes or no?” 62% of individual investors answered no, while 75% of institutional investors answered no. Zweig writes:
The professionals were less likely to conduct systematic research than Joe Sixpack Investor.
Action Line: What’s important to remember is, invest with a plan, rather than wildly reacting to events. When you want to build a plan for your portfolio, email me at ejsmith@yoursurvivalguy.com.
Read the entire series here.
