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Investors pay a premium for the illusion of predictability. - Jason Zweig
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The Gambler's Fallacy
Princeton professor Daniel Kahneman warns, "If owning stock is a long term project for you, constantly following price changes is a very, very bad idea."
Short term price movements-day to day, or week to week-tend to be very "noisy" and random. That's why attempting to divine trends from this is wholly unproductive.
I am amazed at the level of certitude that is often exhibited in postulating about current market "trends." This has been quite evident of late, as stock prices have lost ground after moving nearly straight up for nine months.
Is the rally ending, or is it just a lull?
This is what we call "the gambler's fallacy."
In a coin toss, if a long series of heads or tails are achieved, some think the coin is "overdue" for a correction and predict that the "trend" must end.
What this fails to recognize is a coin toss is always 50/50. The coin has no memory.
As we find in the spreadsheet below-"Asset Class Returns Since 1973"-asset category performance is random. Over long periods, a diversified portfolio dramatically outperforms all other categories...and has never been the worst performing category.
- James E. Wilson, CFP® My Blog
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