Individual investors have had a long love affair with Apple (AAPL). SigFig data has shown that it is one of the most popular stocks for investors of all ages, and over the past few years, SigFig users have not just held the stock but continued to acquire more of it. However, recent data suggests that some investors’ optimism may have waned in the lead-up to the company’s first earnings announcement that will include sales figures on the Apple Watch.
Our Apple Optimism Index tracks the portion of investors trading Apple stock who are buying versus selling it. Since 2011, we’ve seen steady interest in the stock. During most weeks, more Apple investors are buyers than are sellers, but buying tends to spike immediately prior to product announcements. For example, 69% of Apple investors were buyers right before the announcement of the iPhone 4S, and 72% were buyers in advance of the iPad mini announcement.
At first, investors showed similar excitement about the Apple Watch. In the week leading up to the first announcement of the product in September 2014, 75% of Apple investors were buying the stock and only 25% were selling. Leading up to the March 2015 Apple event in which the company gave the world a closer look at the watch, almost 70% of Apple investors were buying.
More recently, however, buying activity has dipped. In the week leading up to this quarter’s earnings announcement, less than 60% of Apple investors have been buying, and as many as 40% of Apple investors are selling the stock. There has been a lot of speculation that sales of the Apple Watch will not compare favorably to those of the iPod or iPhones. Recent buying and selling behavior suggests that some individual investors may expect disappointing news from this quarter’s earnings.
Of course, with 60% of Apple investors buying the stock, a majority of investors are still betting on the company to continue to outperform. However, our Apple Optimism Index suggests that investors are not as optimistic about this quarter’s earnings as they have been about other major events in Cupertino.
Stock-picking is hard, even for the professionals–and it is only getting harder. A recent study by professors Robert Stambaugh and Luke Taylor at the Wharton School of the University of Pennsylvania, and Lubos Pastor at the University of Chicago, found evidence that it’s getting harder and harder for active mutual funds to outperform index funds. Why? Because the mutual fund industry as a whole keeps getting bigger.
The more investors there are looking for great investing ideas and exciting, underpriced stocks, the harder it is to find anything the rest of the world hasn’t already discovered. In fact, the researchers found that active fund managers are actually getting better: they are more skilled at investing, but it doesn’t matter, because the industry is simply getting too big. Managers have to be more skilled just to keep up with the increasing competition.
If the pros are getting more and more skilled without getting ahead, then why do individual investors think they can beat the market? SigFig data shows that the more individual investors trade, the less they earn. Individual investors also tend to bet too heavily on single stocks: 60% of investors have more than 10% of their portfolio invested in a single stock. Picking stocks and trading actively in an effort to beat the market simply doesn’t work for individuals.
So why do investors keep doing it? What makes people think they can succeed where so many others, including highly educated professionals, are doomed to fail? According to a review of the research on investor behavior by Brad M. Barber, a professor of finance at the Graduate School of Management at the University of California, Davis, and Terrance Odean, a professor of finance at the Haas School of Business at the University of California, Berkeley, there are three reasons why individual investors engage in the self-defeating effort to beat the market:
1. Investors are overconfident.
Research shows that individual investors are overconfident–they think they know more than they do, and they think they know more than the average person. In fact, the more an investor thinks they are knowledgeable about investing, the more they are likely to trade frequently. And, of course, the more they trade, the worse they do. Incidentally, men tend to be more overconfident than women, and tend to trade more often. They are also more likely to lose money in the market than women are.
2. Human emotions get in the way.
Individual investors have an unfortunate habit of selling their winners and holding on to their losers. From a tax perspective, it makes more sense to let gains run and sell losing stocks for the tax credit. But individual investors tend to get a little rush of pride when they sell a winner and realize a gain. When they sell a losing stock, on the other hand, they feel pain and regret. Basically, investors hold on to losing stocks to avoid that pain. This effect might be particularly strong for investors who have chosen the stocks in their portfolio themselves and attach their feelings to it as a result.
3. The media encourages “herd mentality” behavior.
Investors tend to rush into stocks that receive media coverage. Companies that hit a new stock price high or beat earnings predictions are showered with affection from individual investors, because those news events draw investors’ attention. After all, there are way too many stocks out there for any investor to be knowledgeable about them all. A news story about a stock offers information that some may believe is enough to act on, without going through the trouble of doing additional research.
News stories can also spark selling, of course. A current example are the headlines blaring that Greece is about to default on its debt to the IMF. Investors who sell when stocks start to fall, however, take a loss–and miss the upside when the markets rebound. The best move during a downturn is often no move at all. Stay put, stick to your plan, and keep buying at regular intervals.
If individual investors cannot beat the market–and even professional investors, on the whole, cannot–the best plan is not to try. Choose a diversified set of low-cost index funds and stick with them, avoiding the temptation to trade heavily or jump on the latest over-hyped winner. And remember, if you still think you can do better than the average investor, that may just be your overconfidence talking.
Fitbit’s (FIT) June 18 IPO valued the maker of wearable activity trackers at over $4 billion, and its shares rose more than 50% in the first day of trading. This week, the stock saw more gains after an analyst predicted it would outperform and could rise to a price of $45 a share (it’s currently trading at just over $40 a share).
FitBit’s users are health-conscious, relatively tech-savvy, and motivated by pie charts and badges that track their progress towards a goal. But who are Fitbit’s investors?
According to SigFig data, here are three characteristics of investors who’ve jumped into Fitbit’s newly public stock:
FitBit IPO investors like tech stocks
Investors who bought FIT in the first 10 days it was available have about 40% of their stock holdings invested in the tech sector, compared to 32% for all investors who bought any stock in the same period.
In general, SigFig data shows that many individual investors haven’t sufficiently diversified their investments. They tend to bet too heavily on individual stocks, and most are over-invested in stocks and underinvested in bonds.
Almost half of them are IPO fans
Fitbit has sold millions of its activity trackers, and certainly some investors may have bought the company’s newly public shares because they’ve heard a lot about it or are customers themselves. However, SigFig data shows that about 4 in 10 investors who bought FIT also bought other recent high-profile IPOs like Alibaba (BABA), GoPro (GPRO), Mobileye (MBLY), Twitter (TWTR), and Shake Shack (SHAK) within 12 days of their debuts.
Like Fitbit, many of these IPOs also grabbed headlines with big first-day gains. Unfortunately, only institutional investors who own shares before an IPO really participate in those big jumps. Individual investors who buy into an IPO after the shares are public pay a premium, and typically see far smaller gains.
Nearly a third are active traders
Almost a third of the investors who bought Fitbit stock in its first few days on the market have already sold some of their shares, and 1 in 5 investors who bought the stock have already sold all of it. While this short-term trade may have proven profitable, people who trade more typically make less money, because they pay transaction fees for all those trades, and because, for most people, trying to time the market is a losing game.
So how did these tech-loving, IPO-hungry traders do when they bet on Fitbit? SigFig users who bought FIT paid, on average, $34.38 for it. Investors who bought at that price and sold by June 26 would have seen at least some gains. Those who bought at that price and sold on June 29 would have taken a small loss. Anyone who bought at that price and is still holding the stock is, at the moment, sitting on about a 16% gain: not bad, but far from the 50% jump trumpeted in the headlines on the stock’s first day.
IPOs get a lot of attention, and they can be very tempting for investors. Particularly when it is a company that you are familiar with from your everyday life, it is all too easy to feel confident that you know enough to know there are gains ahead. However, the largest profits in an IPO have been made before the opening bell rings. Individual investors should be cautious, and patient, when buying into brand-new stocks.
How are you doing, financially? Are you satisfied with the state of your finances?
Think about your answer to that question and what drove it. If you are like most people, you were probably thinking about your day-to-day financial health — your ability to pay your bills and buy the occasional movie ticket or latte.
A recent study from the Center for Retirement Research at Boston College found that people’s subjective assessments of their own finances are based on those day-to-day measures. That’s true even for people who are financially literate. Having a little financial education makes you slightly more likely to worry about not having a retirement plan at all, but it makes you no more likely to worry about having an inactive retirement plan that you’re not currently contributing to. As long as you can pay your rent or mortgage, not putting money away for the future won’t trouble you.
In other words, you can’t count on yourself to worry enough about retirement to actually prepare for it. It’s just too far away to focus on. It is better to automate your savings, so you only have to think about it once. Here are three simple steps you can take to make investing automatic:
1. Max out your contribution to your 401(k).
Most savers don’t manage the maximum allowable 401(k) contribution of $18,000. In fact, average deferral rates have actually fallen in the past few years, partly because most plans that automatically enroll workers start them off saving just 3 percent of their paychecks. Check your own deferral rate, and max out if you possibly can.
2. Add an IRA.
If you are already maxing out your 401(k) and you have some more wiggle room in your budget, consider setting up an IRA or Roth IRA. You can save another $5,500 a year this way. Figure out how much you can contribute to this account, and look into setting up an automatic investment plan. Most funds will waive minimum initial contribution requirements if you use this option, so you don’t need a lot of cash on hand to start an account, and you won’t have to keep remembering to contribute in the future.
3. Automate your contributions to your regular brokerage account.
Don’t wait until the end of the quarter, or the end of the year, to decide how much you can afford to put away. Assuming you have already funded an emergency account and have all your monthly bills covered, why let money languish in an ordinary savings account, earning today’s meager interest rates, when you could invest it and put it to work for you? By setting up an automated contribution to your brokerage account every month, you won’t be tempted to spend the money, and you will take emotion out of your decision to invest. The money will automatically flow into whatever asset allocation you have decided is best for your long-term goals.
As long as you make sure to choose low-fee options in each of these accounts, set it and forget it is the best way to save. You can’t count on worry to motivate you, so you should instead take responsibility for your retirement saving out of your own fallible hands.
How do you feel about your investment portfolio? When you look at the stocks, ETFs, and funds you’ve selected, do you feel a sense of accomplishment — a sense that you’ve built yourself a strong shelter against the ups and downs of the market?
Is your portfolio simply a vehicle financing your future… or is it more than that: a report card on your own ability to make good choices?
“People tend to have their worth attached to their portfolio performance,” says Marc Pearlman, an investment advisor who specializes in motivation and investor psychology. Perhaps even more than performance, or making money, he says, “what the investment vehicle produces for them is whether they’re right or wrong.”
This phenomenon is known as the IKEA effect and psychologists have studied it extensively in the consumer context. Studies have shown, for example, that people who assemble a LEGO car themselves are willing to pay more for it than people who get it pre-made, because successfully creating something creates a feeling of competence.
The IKEA effect works because once we’ve been involved in putting something together, the product isn’t just the product anymore, says Daniel Mochon, an assistant professor of marketing at Tulane University and one of the researchers who have identified and explored the phenomenon. It’s the product plus the proof that we’ve accomplished something. “Products that we create play this extra role of signaling competence to ourselves and others,” Mochon says. As a result, we attach additional value to them.
Mochon hasn’t studied this effect in the investor context, but he says it shows up in a fairly broad range of consumer contexts. One study found, for example, that people who made a milkshake themselves liked it more than people who had the same milkshake made for them. “As long as you’re involved in the process of creation, you value the end product more,” Mochon says, and that can lead to trouble when your perception of the object’s value differs from that of the market, he says.
Investors can fall into the trap of attaching too much value to their own abilities, Pearlman says. That’s one of the reasons why people are so reluctant to sell their losers: “because that proves them wrong,” and destroys their feelings of competence. On the flip side, investors might hold onto winners too long, too, because the stock’s gains serve as a confirmation that they were right, and they made a good decision when they bought, Pearlman says. “When you’re right, you feel as though you’re going to continue to make a lot of money with something,” he says.
The key, Pearlman says, is to know why you bought that investment in the first place, and to sell when that purpose has been accomplished–or when it’s clear that the investment thesis has not panned out as planned. The more you can take your own emotions out of your investing decisions, the better, he says.