When investing, following your instincts often leads to selling low during market downturns and buying high when prices rise, ultimately hurting your long-term returns.
Over the last decade, while US mutual funds averaged a 7.3% annual profit, individual investors only achieved an average return of around 6.3%, highlighting the detrimental impact of emotional investing.
The so-called 'gap' in performance, where average investors receive less than the funds they're invested in, suggests that behavior, fueled by emotional reactions, can result in significant financial losses.
Investors need to recognize the cognitive biases at play and employ strategies such as diversification and cost reductions, rather than being swayed by short-term market fluctuations.
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