Phoenix (Jan. 9, 2003) -- Common "mental accounting" mistakes lead investors to make poor decisions that cost them big bucks, a proponent of passive investing told attendees here at the American Institute of CPAs Personal Financial Planning Technical conference.
The majority of investors are overconfident in their stock-picking skills, and end up making risky investments and failing to diversify, Larry Swedroe, Director of Research for BAM Advisor Services told CPA planners in a session titled "Rational Investing in Irrational Times."
Investors often make the mistake of watching yesterdays winner's and buying high and watching yesterday's losers and selling low, Swedroe said. They also let ego dominate the investing process, and tend to treat the highly-likely as certain and the highly-unlikely as impossible, he said.
Making the case for passive investing, Swedroe noted that of the 500 companies in the original S&P in 1957, only 74 remained in 1998, and of those remaining, only 12 outperformed the index. "Individual stock picking is speculating, not investing," he said.
-- Melissa Klein
