Things change. And that is normal despite our preference for everything to remain constant. In weather terms, we all want sunny, mild weather but in reality, rainy, stormy weather is normal. In stock market terms, we all like the market to go up a bit every day but we must realize that volatility (price change) is normal.

The markets have been quite unvolatile for the past few months. We have not seen this low a volatility level in more than 3 years. This will inevitably end...change. In many ways the economic input (jobs, taxes, housing) has been out of sync with the output (stock market returns) as witnessed in the investment markets.

As we often repeat, "emotion overwhelms reason" and in periods of low volatility investors can easily be lulled to sleep. When normal times reappear, these same investors often over-react and pull out of the market. This usually has damaging and often long lasting consequences.

The first chapter of Barriers to Financial Security, we discuss the very real cost of investor behavior. The chart depicts results from a Dalbar, Inc. study that shows a 7% per year difference between what markets provide and what average investors actually earn. Most of this is directly attributable to behavior.

James Wilson recently co-authored a white paper that focuses on investor behavior. The first chapter of Barriers to Financial Security: Important Lessons is available here.

Subsequent chapters will follow in upcoming issues of STAT.