Will emotional investors lose faith in efficient markets after 2011?

Personal finance is a broad field, filled with very bright thinkers. While I have much to teach young doctors about financial planning, I would need another lifetime to write and teach everything they need to know about investing Rather than recreate content about investing, I plan to share what I uncover in the articles and blog posts from other thought leaders in the field. I'll point you in the right direction and add a few thoughtful words of my own to help you on your way.

 And of course, if you have questions about investments, I'm here to help answer them.

In the final weeks of the 2011, the investment markets see sawed between positive and negative territory for the year. In a year marked by political and economic uncertainty here, in Europe and in Arab nations, the fact that the markets are at or near positive territory for 2011 is remarkable in itself, but only if you've had the temerity to hang on to your investments.

Investing is an act of faith

The act of investingputting your hard-earned money to work in an at-risk endeavor with uncertain prospects for a positive outcomehas always been a leap of faith on some level. Uncertainties abound, and mountains of research testify to the fact that it's impossible to time the markets.

Despite that fact, investors continue to search for ways to glean the reward while sidestepping the risk.  The credit crisis, the dot com crash, and the real estate crash are so clearly visible in the rear view mirror that it seems we should somehow have seen them coming. While it seems like a good idea to spot investing bubbles and do everything you can to avoid them, this post from the New York Times Bucks Blog makes it clear that "looking for a bubble spotter is just the latest way we've come up with to trick ourselves into thinking that there is a way to time the markets."

Markets are more efficient now than ever

It's easy for investors to become bedazzled by mutual and hedge fund managers who beat the market in the short run. "If they can do it, I can too" is what the wishful investor thinks.

The truth is most stock pickers -- whether professional or amateur -- cannot consistently beat their benchmarks. It's a loser's game, primarily because the market has become more efficient during the past 50 years.

So what do I mean by "efficient"? An efficient market is one where information about securities in that market is priced into those securities as soon as the news is available. Efficient markets leave little room for people to make profits without bearing risk.

In this post at the MarketRiders blog, you can read up on the five reasons why stock pickers are playing a fool's game.

Investors only get two emotions

Many investors have a hard time gauging their appetite for risk. That makes it easy to take on too much risk when markets are rising and or avoid risk when they are declining.

Unless you're firmly grounded somehowby years of personal experience, by a set of written investment guidelines, or by the steady hand of a rational advisormarkets like we've experienced over the past ten years may cause you to vacillate between the two emotional extremes of greed and fear.

In fact, you might begin to believe that the tried and true strategy of "buy and hold" is dead. I assure you, it's not. In this article by Larry Swedroe for CBS News, you can see that there's far more to "buy and hold" than meets the eye. Swedroe stresses the importance of buying a diversified portfolio, holding the right mix (or asset allocation), rebalancing to maintain risk exposure and avoiding unnecessary taxes on your holdings.

Swedroe cites a well-known Warren Buffett quote that is worth repeating: investors "should try to be fearful when others are greedy and greedy only when others are fearful." And right now, they're fearful.

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