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I conducted a poll on the Canada Board, asking Canadian investors at the Motley Fool to estimate their future long-term returns from investing. The median response was 11-15%, with a fair number selecting 16-20% or even >21%. Only a quarter said 6-10%. But in the very next post, when I asked them to estimate the long-term returns from the overall market (i.e., all other investors, except them), the median response was overwhelmingly 6-10% (77% response). The 5% wide categories don't allow for that much inference, but with yields on long-term government and investment-grade corporate bonds at 5.5% to 8%, it seems like investors aren't attributing a lot of premium performance to stocks, in aggregate. But they are attributing a lot of premium performance to their own ability to select the handful of stocks that will allow them to outperform the market. In my opinion, this is rather equivalent to the 85% of Swedes who'd rate themselves as “above-average drivers.”

My guess is that the investors who are clinging to stocks aren't necessarily doing it because of overwhelming conviction that stocks will/may/might outperform bonds in the long run (although many of them may very well believe this—it's the standard spiel from fund companies). But I'd argue that they're really wagering on their ability to outperform stocks/bonds in the long run, or alternatively to select the fund managers who will provide this outperformance. The irony is exacerbated when you realize you can use Vanguard funds to track the market with about 20 bp in frictional costs, whereas the average active investor probably has an additional 150-200 bp hurdle to clear, and therefore has to do that much worse, on average.

The lottery behavior you cite is perplexing, but I admit, very real. I'm guessing that there are a lot of psychological things at play here. The small amounts of money allow for mental accounting of “inconsequential sums”. I'm guessing that if you took a $5/week lottery player and gave them their $250 per year and asked if they wanted to “invest” in a game where the potential payoff was huge, but the average profit to the market maker was 40%, they'd say “no thanks.” But then again, I'm probably wrong. There are a lot of 1-3 contract call and put positions traded every day on the CBOE.


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