FYI: Less-experienced investors are failing to diversify their assets, according to new research.
Researchers from the University of British Columbia’s Sauder School of Business asked people to create portfolios of financial assets. Participants were tested on their financial literacy and given tables of previous returns to guide their decisions.
Individuals who scored low on the financial-literacy tests were likely to make unwise investments. In particular, these investors chose to put their money into “positively correlated assets,” or stocks that typically move together.
“An amateur investor might buy stocks in lumber, mining, oil and banks, and believe they are diversifying because they’re investing in different companies and sectors,” study co-author David Hardisty, an assistant professor at Sauder, said in a statement. “But because all of those equities tend to move in unison, it can be quite risky, because all the assets can potentially plunge at the same time.”
The authors predict that some of these inexperienced investors would be better off picking stocks at random. And when asked to create a portfolio they perceived as risky, amateur investors actually made safer choices.
Regards,
Ted
https://www.marketwatch.com/story/the-no-1-mistake-rookie-investors-make-and-how-to-avoid-it-2019-08-15/print
