It amazes me how people continue to make the same mistakes over and over again. I'd like to believe that people are rational, that they act in an enlightened, self-interested way. But, again, when it comes to investing, the animal spirits — the ancient lizard brain — control the rational, modern mind.

It is worth reporting on — again — because the habit of the retail investor is so predictable. Buy the hot dot when the market is hot. Sell after it crashes. BankRate.com published a study in late April showing that despite the equity market's bumping up against four-year-highs, many investors (your clients and potential clients) remained on the sidelines. Essentially, individual investors have been selling domestic equity funds for five years and so have missed or partially missed the recent rally. Of course, now S&P 500 valuations are approaching historical averages when the bullishness ends. Wonder if money is creeping into stocks now …

BankRate.com says 29 percent of respondents reported being richer in the past year, compared to 23 percent saying they were poorer. Nevertheless, about 76 percent of respondents said they were not inclined to invest in stocks. The report says that, in fact, respondents feel insecure financially. I guess the wipeout that was the “oughts” left a real mark.

And my old employer, SmartMoney magazine, reports that size does matter. Funds that swell up with assets tend not to perform as well as when they were smaller. Nothing succeeds like success, and investors chase the fund manager with the hot hand — even if his hands are not so hot anymore.

Another thing that makes me crazy is how people believed until recently that domestic real estate prices always went up. I hear people say, “My parents bought their house for $26,000 in 1967 in suburban New York and now it's worth $2 million!” As a store of value, fiat currency is a lousy one, as we all know. That $26,000 in 1967, inflation adjusted, is worth $178,568.62, in today's dollars. That is still a wonderful return, obviously, but you still had to be rich to have purchased the house back in 1967, especially when you are talking after-tax dollars that were saved up for the down payment. Basically, home values have risen a little ahead of inflation since World War II, according to Robert Shiller, the Yale professor who called the housing price collapse (as did many others; including this magazine in a June 2005 cover story, “Duck and Cover”) way before it happened. In fact, Shiller points out that housing prices have actually fallen an average of 3.6 percent over the last eight years. During the height of the boom, the public expected rapid price increases of over 10 percent a year, Shiller says in the April 22 and 23 weekend edition of the Financial Times.

During the Great Buying Panic of the 1990s, I asked one FA what his single biggest problem was. His answer? “Managing my clients' expectations.” And that goes both ways, from being overly frightened to being too risk-loving.

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