SINGAPORE (Jan 22): IF one simply buys the US stock index and holds it for 100 years, one can earn yearly returns of 10%. That is substantial and one can expect to double one’s net worth in seven years, quadruple it in 14, octuple it in 21 and increase it by 16-fold in 28 at a 10% growth rate.

The truth is that 99% of investors fail to achieve yearly returns of 10% despite earnest efforts, and thus miss out on the pleasure of growing their returns by 16-fold.

They try to time the stock market in the quest for better returns, but end up with a poorer result instead. This is owing to our herd instinct — shaped by years of a hunter-gatherer existence. Our success as a species depended on us being able to live and hunt together; it was either the woolly mammoth or us. Stay close together, move together and do not stand out. Unfortunately, this primal instinct works against us in the stock market. If one watches the market too closely and follows the minute-by-minute news, one would succumb to the emotions of the crowd and end up doing the opposite of what a rational investor would do. One would succumb to euphoria and increase one’s positions in a rising market or dump them in a faltering one. For example, as recently as 2006, when valuations were low, investors were afflicted with malaise. But today, in 2018, they are back with animal spirits.

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