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Biggest Investor Pitfalls

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    Brad Barber, UC Davis finance professor, on his recent study that tracks investors’ biggest pitfalls.

  • Duration 3:10
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OK well investor confidence is taking another hit in the wake of earnings warnings Google's premature release and so much more the IPO FaceBook to name another.

Our next guest has studied investor behavior and found of the biggest mistakes investors make especially in this environment and he's gonna tell us what that.

Finance professor at UC Davis -- before we get to that Bret thank you for being with us.

There's -- to be at least of faith in the system right now has to be a little dented -- we've seen these hiccups along the way.

Hello I'm sure that investor confidence and certainly winning in the aftermath of the financial crisis and some of the issues that.

Markets have faced recently.

But at the end of the day I think most financial economists would say that simple solution for.

Most investors as to buy a well diversified mutual funds and kinda stay the course sort of buy and hold long term perspective.

So professor what all the biggest mistakes that investors may hidden it -- that research that you've been doing telling you.

Well I I just told you what they should be doing in that I was so what are investors actually doing -- -- and so.

But it probably leave the three biggest mistakes number one is investors tend to trade too much and so they react to news they buy right away and they buy Google.

They don't react to all the news stories that you guys are generating sort of to rain on the parade here I -- That problem -- that probably is not the smartest thing to do because.

Once that news comes out everyone knows it and so market prices tended to -- fairly quickly.

-- the Smart thing to do is avoid the trading cost avoid the taxes that come with that's that's mistake number one.

The -- mistake number two -- folks often fail to diversify effectively.

-- much of the -- seems to indicate that investors buy things that are familiar to them and then probably one of the biggest mistakes -- investors tend to over invest in their own company's stock.

And the lessons of Enron and WorldCom when they went bankrupt and more than half of their retirement portfolios at those companies wasn't own company stocks is probably the most salient example of that.

And the third it does sort of mistake as investors tend to sell -- winners.

They hold their losers which sounds like a profit making proposition that in fact from a tax perspective it's exactly the opposite.

Exactly.

I mentioned to know how far reaching was -- research you know what areas did you study.

Well so my own research so long with Terry eighteen that UC Berkeley we've studied retail investors.

Using data -- large discount brokerage firms we've used all the trading records of investors in Taiwan.

The review paper that we Rhode highlighting the biggest mistakes.

Really reviewed over a hundred studies on this and one of the biggest messages that comes out of this is the average individual investor -- -- the market.

And again this leads us back to the recommendation and that if you just told an index fund you get the market -- -- turn.

Which may not be terribly exciting but it's like shooting parliament golf course it's it's actually very good outcome for most investors great information -- Bob a finance professor at UC Davis thank you so much for joining us --

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