12:57 am - An interesting article on what is happening to average investors in Msia !

The Fate of the "Average" Investor
byVan K. Tharp, Ph.D.
Joe Smith retired in 2003. He had done well during his working years and had a retirement income of $6,500 per month, including his social security. He had saved about $623,000 as a nest egg for emergencies in his retirement. He still owed about $350,000 on his house. Joe and his wife debated a lot about whether or not they should pay off the mortgage with their cash. The house payment was nearly $2,000 per month and if they paid it off, they’d have plenty of money to spend each month and little to worry about.
Joe had lost about 30% of his retirement nest egg during the market crash from 2000 to 2003. However, in 2003 the market was going up. Joe figured the worst was over, and he could probably make 10% per year on his money. That would give them an additional $5,000 per month for spending, which more than covered his mortgage payment. Joe had an advanced degree in civil engineering and as far as he was concerned, investing wasn’t rocket science. He’d do well in the market because he was a smart guy. Chances are, he thought, he could be better than average and get his account back up to a million dollars (like it was before the 2000 crash).
Joe made the mistake that many people make. He’d spent nearly eight years learning his profession and much of his life staying on top of it. He thought he was smart enough to out perform the market professionals and make 10% or more each year as an investor in retirement. After all, it just amounted to picking the right stocks and he could do that.
Joe was now 68 years old. His total education in the market consisted of reading three or four books on how to pick the right stocks plus a book about Warren Buffett, written by someone other than Warren Buffett. He also watched the financial news regularly, so he was sure he could make his fortune. And he read several financial newspapers each day, so he felt informed.
For a while, Joe was right. He made about $120,000 with his investment from 2003 through 2005, and they spent about half of that. Thus, Joe’s account at the beginning of 2008 was worth about $683,000. However, Joe was not ready for the second leg of the secular bear market. On September 30th, the stock market was down over 20% for the year, and Joe’s account was down 29%—it was now worth about $478,000. If he paid off his house now, it would take most of his assets. And when the bailout bill passed, he watched the market fall by triple-digit declines each day. Joe was really worried as his account balance approached $400,000.
The CNBC gurus, Suzie Orman and Jim Cramer, say stocks will soon be a bargain. "Don’t sell unless you need the money." Didn't they realize that by that standard of just invest and hold, he was down nearly 60% from his equity high in 2000? In fact, Joe now needs to make 70% on his money just to break even on the year, and he was struggling to make 10% per year.
What’s the bottom line here? Joe spent 8 years getting his education to become a good engineer. Yet, he treats the investing process like anyone can do it. It’s similar to walking into a hospital and asking to operate on someone’s brain without any training. You can’t do that in the hospital, but it’s easy to do in the market. In the hospital, it would mean someone’s life. But when you do it in the market, it means the death of your account.
What does it take to trade successfully—especially in this market? Remember, we’re in a secular bear market that could last another 10 years. The U.S. as a country is bankrupt and no one seems to realize it because we spend money like crazy. The 700 billion to bail out the troubled debt is just a drop in the bucket. It could get much, much worse. And what happens when the baby boomers really need cash for retirement and there is a net flow out of the stock market? There will be a giant sucking sound coming out of the market!
Ask yourself the following questions:
1. Do I treat my trading/investing like a business? Have I prepared for it like a business?
2. Do I have a business plan—a working document to guide my trading business?
3. Do I make mistakes regularly where a mistake means not following my rules?
4. Am I following the ten tasks of trading to prevent mistakes?
5. Do I have a tested system? Do I know how that system will perform in different kinds of markets?
6. We’re currently in a volatile bear market. Do I even know what to expect from my system in such a market?
7. If I don’t, am I still trading it?
8. Do I have exit points preplanned for every position I currently have in the market?
9. Have I developed specific objectives for my trading?
10. Do I understand that I achieve my objectives through position sizingSM? Have I developed a specific position sizingSM algorithm to meet my objectives?
11. Do I understand the importance of the first ten points?
12. Do I understand that I create my own investment results through my thinking? Do I accept responsibility for that creation?
13. Do I regularly work on myself to make sure that I follow the above 12 points?
Circle all of the responses that are true for you. If you have not circled at least ten of the thirteen, then you are not taking your trading seriously. Your financial health is in danger.