From Here to Financial Happiness

Day Fifty Five History Lesson

Today, we'll look at your experience as an investor. Start with two thoughts. First, the best predictor of our future behavior is our past behavior. Second, we misremember the past.

In truth, “misremember” is too polite. We often believe our investments performed far better than they really did. We imagine that we foresaw major market developments. We might even remember bravely buying during a market decline, when we were, in fact, panicked and selling. We lie to ourselves all the time – and yet we don't even know we're lying.

All this makes it hard to become better investors. Want to get a handle on how smart you have been and the mistakes you've made? Forget your recollections and look at the evidence:

• If your brokerage firm, 401(k) provider or mutual‐fund company calculates your personal rate of return, see how it compares to major market indexes. For instance, you might compare your personal rate of return to the performance of Vanguard Group's total stock market index fund and its total bond market index fund. Make sure you're looking at performance over the same time period. Does your personal performance look weak? Perhaps you should stop trying to pick winning investments and instead purchase index funds that simply track the market's performance.
• If you were investing in late 2008 and early 2009, when global stock markets collapsed, grab your old account statements and see whether you were buying stocks or selling. If you were a seller, ...