Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

<title>Dismiss</title>
Investing Basics

Don’t Flatter Yourself

"In 2010, the average domestic fund investor saw a return of 11% less than the annual return for the fund."*

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: January 19, 2012

We’ve shared this stat. in the past. I’m sharing it again because it’s astounding – and such a good example of how humans are predictably irrational.

 

Why Do We Make Such Bad Decisions?

Overconfidence bias: Ever thought you were better than most people at something? Like bargain shopping, driving, or cooking? It turns out that we humans all tend to think we’re above average in some situations where we’re likely just average (or worse!). Investing is no different from those other skills we inflate – many people think they can earn above-average returns through their superior abilities (despite much evidence to the contrary). The reality is that trading is hazardous to your wealth, and studies have shown that active stock-pickers generally perform worse than passively selected index funds that track market averages. Many people think they can outperform the market, but they rarely do in the long term.

Sticking with what we know: In many areas of life, the familiar is important to our decision making–but in investing, going with what we know can send us on a path that diverges greatly from the most effective way to manage a portfolio. The best approach is to diversify your investment.

So, how do you avoid falling victim to behavioral biases that can take your portfolio off the road to long-term growth? The answer is fairly simple: stop flattering yourself! Take yourself – and your irrational decisions – out of the equation.

*Read all about the performance gap on My Money Blog.

Recommended Content

View All Resources
Cash Analysis Methodology

Cash Analysis Methodology

Betterment's cash analysis aims to provide smart feedback when we think you have extra cash that could be earning you more value if it were in a higher yield account.

How to Set Up Your Investments Correctly at Betterment

How to Set Up Your Investments Correctly at Betterment

A quick overview of getting your portfolio started at Betterment based on your financial goals.

How We Use Your Dividends and Deposits to Keep Your Tax Bill Low

How We Use Your Dividends and Deposits to Keep Your Tax Bill Low

Every penny that comes into your account is used to rebalance dynamically—and in a tax-savvy way.

Explore your first goal

Safety Net

This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.

Retirement

Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.

General Investing

If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.

Smart Saver

You could earn 20X more than a typical savings account with our low-risk investing account for your extra cash.

How would you like to get started?

Your first step toward a smarter investing future starts here.

Create a Betterment account

Go ahead and join the smart, modern way to invest.

See what we can do for you

Tell us a bit about yourself, and we'll show you the benefits of investing with us.

Get a free investing checkup

Help us get a sense of your investing approach and see how you could improve.

Transfer a 401(k) or an IRA

Move an existing retirement account into a Betterment IRA.

Download the mobile app

Enjoy the Betterment experience anywhere on the go.

<title>Close</title>

Search our site

For more information and disclosures about the Betterment Resource Center, click here. | See our contributors.