10 Question Quiz: How to Prepare for Both a Bear and a Bull in 2013

Take our little test to see if you’re one of America’s 20 million rational investors. Or if you’re one of the 75 million irrational investors. Just 10 questions: And you’re self-scoring so remember denial’s one of the chief psychological blocks to self-analysis. Most investors say they’re rational, but are not.

Grade yourself: Know where you are on the rational/irrational scale. Then change you behavior and shift into the 20% rational sector. Do it and you will increase your returns by a third.

1. You are convinced you’re an above-average investor?

Studies show that about 75% of investors think they’re “above average.” Warning: Boston research group Dalbar’s studies tell us that in recent decades, the average investor grossly underperforms the market, with after-tax returns less than inflation.

2. You believe you can beat the market by timing and active trading?

Finance professors Terry Odean and Brad Barber studied 66,400 Wall Street investment accounts and concluded: “The more you trade, the less you earn.” The returns of passive investors (2% annual turnover) actually beat active investors (258% turnover) by 50%.

3. You love the adrenaline rush from making investment decisions?

Daniel Kahneman, winner of the 2002 Nobel Prize in economics says “all of us would be better investors if we just made fewer decisions.” Rebalance by adding new money.

4. You rebalance your portfolio more than once a quarter?

Various research studies tell us that the added costs and risks of frequent rebalancing actually lower returns of most portfolios. Remember Buffett’s rule: “Buy and never sell.”

5. You believe cheap online trading accounts actually increase returns?

Odean and Barber research says no. Worse, Ameritrade founder Joe Ricketts admitted to Fortune: “Trading often and heavy is not something that makes you a lot of money.”

6. You believe active traders are making the big bucks?

Unfortunately, even the best winning traders make little for all their efforts, risks and anxieties, averaging about $50,000. Most actually lose money, deny it, then get out.

7. You chase good deals, buy when they’re hot, sell when they cool?

Morningstar research indicates fund investors are very bad timers, invariably jumping in late and high, and panic selling at the bottom. Rational investors do just the opposite.

8. You believe investors acting collectively create rational markets

Wharton economist Jeremy Siegel studied 120 big-up and big-down days in the stock market between 1801 and 2001 and found no reasons for 75% of the turning points.

9. You’re saving too little, your portfolio’s less than $100,000?

Unfortunately the vast majority of Americans have portfolios under $50,000 and their low savings rate tells us they will never have a big enough retirement nest egg.

10. You’re totally confident that we’ll see a new bull market in 2013?

In “Investment Madness,” behavioral finance expert John Nofsinger warns that investors have an optimism bias: “Overconfidence causes people to overestimate knowledge, underestimate risks, and exaggerate their ability to control events.”

Now total up your test scores. How many did you mark true? Too many? You be the judge whether you’re in the irrational investor category. Anyway, remember, test or not, the odds are four out of five that you are making irrational decisions with your money and as an investor, every day, every trade, all year.

Solution? My Zen masters would enlighten with something like: “The answers are in the questions.” Discover them, go back and reread the 10 questions — what you must do in this age of uncertainty (2013) to prepare for a bull market (a rally over 14,165) as well as a bear market (hard fall over a fiscal cliff) will become obvious to you, obvious to all rational investors. Then you will instantly know how to change your behavior and you will win.

Source: MarketWatch

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