3 Financial Rules Which You Should Break

Some time ago, experts dealing with the psychology of investing has proven that the clever crooks on Wall Street for 200 years have been misleading market participants, calling them “rational investor.” Such fiction, obviously, serves well to their creators in the XIX and XX centuries.
But now, having analyzed, with the use of the latest technology, how the brain of the investor works, psychologists came to the conclusion, that the investor – the creature is highly irrational.
Below there are 10 rules you need to know, not because of their knowledge leads to success, but because to the success leads the knowledge about how to break them.
1. Indicators of past periods are not guarantees of future results.
This is the most irrational of the rules, and it is often violated, despite the fact that the Commission on the Securities and Exchange Commission, SEC, requires its presence in all financial instruments. Wall Street brokers endlessly repeats of this rule, if it were, in fact, so much. However, if we talk seriously, even experts of a solid financial weekly Barron `s believe that, although the results of past periods are not a perfect measure, better ones still do not exist. The trick is to understand that when this rule should be ignored.

2. To buy and keep – the rest will accumulate.

Vanguard Group founder Jack Bogle once asked Warren Buffett, known as the “Oracle of Omaha”, what is the best time to sell shares. Buffett replied that there is no such a moment, and that he would prefer to purchase securities forever. Investors may wonder: if such an opinion of so respected financier, like Buffett, maybe it’s true, and you should not sell at all? In fact, the truth is that very few of the approximately 95 million American investors reckon with this rule, and Buffett himself do not always do it. In particular, the portfolio managers each year are changing the composition of their managed portfolios. This rule is more a warning about the risks of active trading and encourages the tactics of buying and maintaining a portfolio of high-quality securities.

3. Skilled managers achieve results that exceed the average.
This is a very misleading statement. The recent resignation of Robert Stanski, which occurred after he led fund Fidelity Magellan from the family Fidelity for several years has demonstrated very satisfactory results, proving once again that the calculation solely on the skills of the manager is irrational. True, every year about 15% of the managers really achieve profitability which exceeds the return of the relevant indices. But this does not mean that the same 15% of managers are successful in different years. And only one of them is able to outperform broad market index S & P 500 for 10 consecutive years. Thus, the probability that the return on investment will be higher if invested in passive index funds is about 85%. But this decision is too rational. In reality, American investors invest in index funds only in 8% of cases, thus proving its irrationality.

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