As a recent survey showed, wealthy people in the US expect their long-term portfolio returns to average 8.5% per year after deducting inflation. With a bond yield of about 2.5%, to achieve this goal it is necessary that in a typical portfolio consisting of debt securities and shares, the yield of the latter should be 12.5% per year.
However, in the long run, it averages only 7% per year, which is almost half that. Not only individual investors believe in miracles.
Returns on investment portfolios usually do not live up to owners' expectations.
According to another survey, every sixth institutional investor predicts that the return on his venture capital investment will exceed 20% per year. At the same time, the average results of such funds were inferior to stock market growth over the greater period of the 2000s. Although there is almost nothing impossible in the financial markets, such expectations border on fantasy. Usually faith in an investment tooth fairy who puts money under her pillow is explained by optimism and self-confidence: hope dies last and each of us considers himself better than other investors.
Many investors believe in magic for another reason: we cannot bear the truth. The theory of an effective market says that stock quotes reflect all available information related to them. But what if investors, on the contrary, so skillfully avoid information, as if it did not exist at all? Psychologists call this behavior "avoidance of information."
It could also be called intentional disregard. “It's a motivated decision to say no to finding accessible but undesirable information,” says Ohio University psychologist Jennifer Howell, who studies this phenomenon. According to her, people do this if the information makes them feel, think or behave in an undesirable way for them. This is especially true of evidence that can undermine their faith in their competence and independence or require the implementation of difficult or time-consuming actions.
After all, information is not just bits of data or curious facts. It can also be fun or painful. If the information is pleasant, then the feeling it evokes makes you pay attention to it. Whereas bad information, many probably want to ignore. Indeed, some people refuse to undergo tests for genetic markers of hereditary diseases, and smokers do not pay attention to health warnings printed on cigarette packages. Investors often behave in a very similar way.
Behavioral economics specialist George Levenshtein and his colleagues, using data from the Vanguard Group management company, have shown that, on average, investors are less likely to check the value of their financial assets when markets fall.
Experts call this the "ostrich effect." Decades of research convincingly show that people are much less willing to sell assets that have fallen in value. To “fix” a loss means not only to make it real, but also to realize the fact of its receipt. If you do not sell the asset, you can not think about the loss and not admit your mistake. True, such behavior is not always harmful.
During a market fall, it can protect against self-flagellation or sale of assets at a time when the market has almost reached the bottom.