There was a 21.2% decline in listing inventory from December 2010 to December 2011.

Relying on typical housing market scenarios and reasonable logic, a decline in listing inventory nearly always meant a tightening market was developing – fewer houses coming on line matched against steady demand meant housing prices were more likely to stabilize or rise.

Declining inventory is the variable in the housing equation that usually makes conditions improve. During the mid-decade housing boom, falling inventory was caused by the insatiable demand by buyers – product could not get out to the market fastest enough. Listing inventory was simply “worked off” by (artificially) inflated demand. Listing discounts approached zero, days on market fell to record lows and prices rose rapidly.

Old scenario: Declining Listing Inventory = declining housing prices ease their decline, prices stabilize or prices rise.

However over the last year, listing inventory fell sharply in many markets yet sales were generally anemic or showing nominal increases. In the NAR numbers, non-seasonally adjusted sales were up 1.4% year over year (using NSA since inventory is also NSA) yet inventory was down 21.2%. Inventory was clearly not declining because sales were overpowering the amount of listing inventory that was available.

Then why is inventory declining?

The answer to this question was not considered in the recent prediction of a market bottom.

New scenario: Declining Listing Inventory = fall in seller confidence and the sharp decline in distressed inventory entering the market.

From NAR…

Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply2 at the current sales pace, down from a 7.2-month supply in November.

“The inventory supply suggests many markets will see prices stabilize or grow moderately in the near future,” Yun said. – National Association of Realtors

We are seeing unusual declines in many markets I keep tabs on such as:

• Baltimore, MD Down 21.6% YOY
• Washington, DC Metro Down 35.8% YOY
• Las Vegas Down 12.9% YOY
• Broward County, FL Down 35% YOY
• Miami-Dade Down 40% YOY
• ReMax National down 25.7% YOY
• Phoenix (Realtor.com) down 48% YOY
• Boise City, Idaho (Realtor.com) down 41% YOY

Admittedly I am cherry picking some of the cities that are posting huge declines in inventory. However the problem I find in all of these markets, is that sales are only increasing a few percentage points. Not nearly enough to explain the rapid decline.

The drops are being touted as a good sign that housing is getting back on its feet. I’m not so sure.

I think the sharp drop in many US housing markets (and this has been happening for much of 2011) has to do with three key reasons:

• A large swath of foreclosure volume was artificially delayed.
• Seller confidence has waned after the pounding it took last fall.
• Low interest rates extended by the Fed for the next two years have removed any sense of urgency.

Declining foreclosure volume is one of the key reason inventory levels are dropping. The 1/3 decline in foreclosure volume in 2011 has resulted in a sharp drop in foreclosure inventory resulting in a sharp drop in total inventory. Distressed sales have been running at about 30% of total sales nationally for a few years but fell to about 20% in 2011. With a 2 million more homes expected to go into foreclosure over the next 2 years, a year long internal review of procedure after the 2010 “robo-signing” scandal and the 50 State AG settlement with the largest services/banks, distressed inventory is expected to rise sharply over the next several years.

Weak seller confidence is causing property not to be released into the market unless the need to sell is not optional. The 2011 home seller and buyer was bashed with the debt ceiling debate, the SP downgrade of US debt, 400 point daily swings in the financial markets, the European debt crisis, the AG/Service settlement drama and the political stalemate on housing policy in Washington. What do people do when faced with the unknown? They sit and wait. Buyers had a lot more incentive to act with falling mortgage rates to record levels but mortgage underwriting grew tighter over the year as well.

The extension of the low interest rate policy by the Fed through the end of 2014 has obliterated any sense of urgency by sellers. I am getting a lot of feedback from real estate professionals about this as well as seeing it within my own appraisal practice. There is a lot going on the world right now and the action by the Fed suggested that they weren’t particularly encouraged by the economy. To many this may seem as an incentive for sellers to get going and sell. But many of those sellers have to buy.

The drop in inventory as a phenomenon may or may not pass quickly but one thing is clear – weird changes in market behavior happen for a reason – I don’t see declining inventory as a particular sign of strength in the housing market.

“I do nothing but go about persuading you all, old and young alike, not to take thought for your persons or your properties, but and chiefly to care about the greatest improvement of the soul. I tell you that virtue is not given by money, but that from virtue comes money and every other good of man, public as well as private. This is my teaching, and if this is the doctrine which corrupts the youth, I am a mischievous person.” ~ Socrates

Every time I see news coverage of street protests in today’s Greece or of political leaders discussing Greek Austerity, I imagine, if Socrates were living today, if he would be there among the protestors and, if so, what he might say or do. Would he support the protestors? What might he say to the government leaders? Would he approve of Greek Austerity measures?

Luxury is Artificial Poverty

Socrates never recorded any of his thoughts or ideas on paper and all that is known about him comes from the writings of his contemporaries, such as Plato. However, it is clear from these writings that Socrates cared little about money and materiality and he certainly shared no affection with the ruling Aristocrats. Many accounts of Socrates describe him as something of a poor, unattractive hermit wandering the streets of Athens, teaching his philosophies to anyone who would listen. In a time when men labored for a living and spent much of their free time working for the affairs of the city aspiring to political power, Socrates did neither.

In today’s Greece, I believe Socrates would still find himself in the unique position of standing in a corner completely his own–neither with the protestors, nor with the government. While he might sympathize for the struggle of the Greek people against the governing leaders, he would remind the people that money is the corrupting force at the root of all of their troubles and that they would find contentment to let go of their material desires and to end their reliance on government to cure their ills.

Socrates to Greece: Die But Don’t Forget to Pay ‘Debt’

The featured quote at the beginning of this post comes from Plato’s account of the trial of Socrates, where Socrates was accused of “corrupting the youth of Athens” and was given the choice to either denounce his philosophies or die by drinking the poison hemlock. Socrates chose death.

His last words were reportedly spoken to Crito, where Socrates said, “We owe a rooster to Asclepius. Please, don’t forget to pay the debt.” Asclepius was the Greek god for curing illness. Therefore these words are interpreted to mean that death is a cure and a means to freedom.

I would never expect a political body to take the path of a wise philosopher, but Socrates would likely say today that Greece must metaphorically die–to split from the European Union–to be cured of its ills… And, yes, don’t forget to pay your debt to Asclepius…

——————————————————————————————————–

Follow Kent Thune on Twitter or subscribe to his blog at The Financial Philosopher.

Article source: http://www.ritholtz.com/blog/2012/02/socrates-advice-to-greece-today/

“Congress, 535 commoditized temple monkeys pawing through the ruins of America in search of bribes. The bicameral whorehouse on Capitol Hill works like a vending machine. You put coins in the slot, select your law, and the desired legislation slides out.”
-Fred Reed, May 30, 2009

I added it to the QOTD in the sidebar, but I wanted to pull it out for emphasis . . .

Article source: http://www.ritholtz.com/blog/2012/02/bicameral-whorehouse/

Although markets have already rallied strongly in 2012, the move is still early if current price ratio trends behave similarly to recent history.  The chart shows the price ratio of the SPDR SP Dividend Index ETF (SDY) relative to the SP 500 (SPY).  A rising price ratio means dividend-oriented stocks are outperforming (risk-off), while a downtrend suggests the opposite (risk-on).  Much like a pendulum that swings from fear to hope, investor sentiment goes through cycles in terms of what type of returns are preferred at any moment in time.

Notice the far right of the chart.  When we last put the post up on January 10th, the rally was just getting started, and dividend-oriented sectors such as Utilities (XLU), Healthcare (XLV), and Consumer Staples (XLP) started underperforming in a meaninful way.  The persistance in the downtrend could result in further weakness in dividend stocks and strength in more cyclical/capital appreciation sectors.  The estimated underperformance in SDY relative to SPY should the ratio return back to its support range is a bit under 5% on a spread trade basis.  Either way, the point is that a downtrend in SDY/SPY is the bull investor’s friend, and there is likely much more room to fall in terms of the movement away from income and into growth.  I discussed this idea at length in an interview I did on Bloomberg Radio last week, which can be heard

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

The contrarian trade is no longer about markets going up or down, but about the length of time the trend persists.

~~~

Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, where he structures portfolios. Prior to this role, Michael served as a Portfolio Manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Michael earned his B.S. from New York University, and is a CFA Charterholder

Article source: http://www.ritholtz.com/blog/2012/02/more-room-to-rally/

• Crude Oil Likely to Remain Well-Supported on Iran-Linked Tensions
• Gold, Silver Buoyed by Inflation Bets But US Dollar Gains May Weigh
• Copper Vulnerable as SP 500 Futures Point Toward Risk Aversion

Tensions between Western powers and Iran continue to push crude oil prices higher, with the WTI contract touching the highest since May 2011 yesterday. Scanning recent developments, the situation remains volatile. While Tehran has at least delayed (if not cancelled) planned military exercises in the Strait of Hormuz initially slated for this week, it is conducting another set of war games meant to prepare to counter “all possible threats, especially to public, important and nuclear centers,” according to private intelligence firm Stratfor. The exercises are reportedly focusing on surface-to-air missile systems, anti-aircraft artillery, radar systems and warplanes.

This kind of display suggests Iran may be starting to legitimately expect an attack on its nuclear facilities in the near term and could be brandishing an appearance of readiness as a deterrent. While it’s next to impossible to meaningfully predict where the situation will go from here, it seems highly unlikely that tensions will be unwound quickly, meaning a significant geopolitical risk premium will continue to amplify crude prices for some time.

Gold and silver rose sharply yesterday as 3-year US inflation expectations (measured by “breakeven rates”, which are the difference between yields on nominal and inflation-adjusted Treasury bonds) rose to the highest in 9 months, stoking store-of-value demand for precious metals. The outlook for price growth in 3 years – significant because it marks the conclusion of the Fed’s stated period when rates will be held “exceptionally low” – has been marching steadily higher recently.

The move likely reflects US economic data’s broad tendency to surprise higher relative to expectations since October, hinting an accelerating recovery against a backdrop of ultra-loose monetary policy will let loose inflationary pressure. More of the same may be on tap today with US Existing Home Sales expected to print at a 20-month high in January. A stronger US Dollar may act as an offsetting factor however. The greenback rose in European trade as Eurozone PMI figures disappointed, weighing on risk appetite and stocking safe-haven demand for the benchmark currency. SP 500 stock index futures are trading lower ahead of the opening bell on Wall Street, arguing for more of the same ahead.

Copper also shot higher yesterday after a deal on the second Greek bailout removed the uncertainty that prevented prices from fully capitalizing on a Chinese interest rate cut announced in the previous day. China is the world’s largest copper consumer, so an easing of monetary conditions there that may boost economic activity naturally bodes well for the cycle-sensitive metal. Headwinds from Eurozone PMI figures are being felt today however, and the weakness in US stock futures ahead of the opening bell suggests that will continue into North American trade.

WTI Crude Oil (NY Close): $105.84 // +2.60 // +2.52%

Prices broke resistance at 105.61, the 123.6% Fibonacci extension, with the door now open to challenge the 138.2% level at 106.81. The 105.61 level has been recast as near-term support, with a reversal back below that exposing 103.66 once again.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1759.13 // +24.18 // +1.39%

Prices pushed higher after putting in a Bullish Engulfing candlestick pattern above support 1714.60, with buyers once again testing resistance at 1763.00. A break above this boundary exposes the November 8 high at 1802.80.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $34.31 // +0.73 // +2.17%

Prices are testing range resistance at 34.37, the February 2 swing high, with a break higher exposing the October 28 closing high at 35.30. Support remains at 32.60, the 23.6% Fibonacci retracement level. A Bearish Engulfing candlestick pattern completed against a backdrop of negative RSI divergence on February 3 continues to suggest the path of least resistance favors the downside, with a daily close above 34.37 needed to invalidate.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.836 // +0.128 // +3.45%

Prices pushed higher after putting in an Inverted Hammer candlestick above support at 3.696, the 38.2% Fibonacci retracement level reinforced by a rising trend line set from mid-December. The bulls have cleared initial resistance at 3.789 and now aim to challenge 3.909. The 3.789 level has been recast as near-term support.

Daily Chart – Created Using FXCM Marketscope 2.0

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya‘s e-mail distribution list, send a note with subject line “Distribution List” to ispivak@dailyfx.com

Article source: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/commodities/2012/02/22/Gold_at_Risk_as_Dollar_Recovers_Crude_Oil_Supported_by_Iran_Tensions.html

• Euro: Fitch Cuts Greece’s Credit Rating, Sees Default In ‘Near Term’
• British Pound: U.K. Posts Budget Surplus, Remains Capped By 200-Day SMA
• U.S. Dollar: Index To Consolidate, Fundaments To Improve Further

Euro: Fitch Cuts Greece’s Credit Rating, Sees Default In ‘Near Term’

The Euro fell back from an overnight high of 1.3263 as Fitch lowered Greece’s credit rating to C from CCC, and warned that a default is ‘highly likely in the near term’ as the group plans to categorize the region’s debt as a ‘Restricted Default’ once the government concludes the PSI deal. At the same time, Germany talked down speculation of increasing the bailout fund at the March Summit, stating that there’s no need to increase the scope of the European Stability Mechanism, and argued against setting precedence for the periphery countries as Greece remains a ‘singular case in terms of the depth of its problems.’

Indeed, mounting threats of a Greek default reinforces a bearish outlook for the Euro, and the single currency looks poised to give back the advance from earlier this year as the fundamental outlook for the region turns increasingly bleak. As the EUR/USD remains capped by the 100-Day SMA (1.3310), the pair appears to be putting in a lower top ahead of March, but we would like to see the pair close below the 50-Day SMA (1.3022) to set the stage for another test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50.

British Pound: BoE Votes 7-2, Sideways Price Action Ahead

The British Pound tumbled to an overnight low of 1.5660 as the Bank of England Minutes spurred speculation for more quantitative easing, but the GBP/USD may continue to track sideways over the near-term as it maintains the range from earlier this month. Indeed, the Monetary Policy Committee voted 7-2 to expand the asset purchase program to GBP 325B, while Adam Posen and David Miles pushed for a GBP 75B increase amid the risk of undershooting the 2% target for inflation. However, we saw the BoE continue to soften its dovish tone for monetary policy as central bank officials expect to see a more robust recovery in 2012, and we may see a growing rift within the MPC as policy makers argue against sending the wrong message about the U.K. economy. Although the GBP/USD sold off following the announcement, we expect to see a short-term correction in the exchange rate as the it continues to hold above the 50-Day SMA (1.5617), and the pair may continue to trend sideways over the near-term as it remains capped by the 200-Day SMA at 1.5914.

U.S. Dollar: Index Hits Fresh Monthly High, Existing Homes Sales On Tap

The greenback continued to appreciate on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh monthly high of 9,893, and the reserve currency may continue to retrace the decline from earlier this year as the flight to safety gathers pace. However, as we’re expecting to see U.S. existing home sales increase another 1.1% in January, the ongoing improvement in the housing market could spur a shift in risk-taking behavior, and an above-forecast print could lift trader sentiment as it raises the outlook for future growth. Nevertheless, the more robust recovery in the world’s largest economy will continue to limit the Fed’s scope to push through another large-scale asset purchase program, and market dynamics may change throughout the course of the year should the FOMC continue to soften its dovish tone for monetary policy.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David‘s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Article source: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/02/22/Euro_Setting_Up_For_Major_Decline_Sterling_Poised_For_Correction.html

See here for the complete report on gold and silver daily setup.

Gold sharply increased by 1.89% to $1,758.5; silver also rose by 3.66% to $34.50. During February, gold rose by 1% and silver by 3.72%.

The ratio between gold and silver sharply decreased on Tuesday, February 20th at 50.97. During February the ratio slightly declined by 2.59% as silver has moderately outperformed gold.

On Today’s Agenda

U.S. Existing Home Sales: in the previous report regarding December the number of homes sold rose by 5% to a seasonally adjusted annual rate of 4.61 million home sales (see here the recent review);

Euro Area Manufacturing PMI (January 2012): In the recent flash report regarding January 2012, the Euro Zone Manufacturing PMI changed direction and reached 50.4 – a move toward the positive for the first time in five months. This report will provide an indicator to the economic development of the Euro zone’s manufacturing conditions;

Forex / Gold Silver– February

Yesterday, the AUD and CAD also depreciated against the U.S. dollar by 0.86% and 0.34%, respectively. The correlation between AUD, CAD and metals is still strong. Therefore, if the AUD and CAD will continue resume their upward trend; it could indicate that precious metals will also trade up.

Daily Outlook

Gold and silver started off the week with very sharp gains; this rally might be related to the recent development in Europe regarding the approval of the Greek bailout package and the effect it had on the Euro and other currencies on Monday when the market had anticipated this news. The upcoming reports regarding the U.S. home sales and EU manufacturing PMI might affect the direction of gold and silver via their relation with USD and Euro.

For further reading:

Weekly Outlook for 20-24 February

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

Article source: http://www.dailyfx.com/forex/fundamental/article/guest_commentary/2012/02/22/Guest_Commentary_Gold_Silver_Daily_Outlook_02.22.2012.html

- Greek Bailout Wins Two Cheers from Wary Investors – Bloomberg

- Obama Readies Plan to Cut Corporate Tax Rate – Bloomberg

- Iran Defiant as U.N. Nuclear Talks Fail – Reuters

- Fitch Downgrades Greece – WSJ

- Despite Pact, Unease Lingers for Greece – WSJ

European Session Summary

The move to risk-aversion continues, even as the EURUSD has steadied following the second Greek bailout yesterday. Indeed, higher yielding currencies and risk-correlated assets have continued to weaken this week, with the commodity currencies posting a second day of losses. Price action to the downside today has been capped by better than expected data out of China and better than expected industrial data from the Euro-zone.

However, despite two “better” data prints, data elsewhere and developments out of Greece have tempered market enthusiasm of a continued rally. Manufacturing and service surveys from France, Germany, and the broader Euro-zone all disappointed to the downside, lending to the notion that the Euro-zone is headed for a recession. I continue to maintain this bias, and believe that the sovereign debt crisis, which has seen severe austerity measures implemented across the Euro-zone, will only exacerbate the downturn across the continent.

In regards to Greece, Fitch Ratings cut the country’s long-term sovereign debt rating to C from CCC. Fitch noted that the new rating indicates “that default is highly likely in the near-term.” This is, of course, unsurprising and expected, considered the measures set forth by Euro-zone leaders to solve the debt crisis – adding more debt to an already overbearing debt burden – will only make matters worse. Although there was little reaction following the downgrade, it only will increase speculation that other rating agencies will follow suit, adding evidence that a Greek default will be detrimental to market sentiment, ultimately raising questions about the viability of the debt-reduction measures implemented in other periphery nations.

GBPUSD 5-min Chart: February 22, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Overall, the Swiss Franc was the top performing currency on the day, posting a meager 0.07 percent gain against the U.S. Dollar. Aside from the Franc, the Euro and the U.S. Dollar were the next best performers, with the EURUSD flat on the day. The British Pound has been the worst performing currency thus far, posting a 0.79 percent decline against the Greenback following the Monetary Policy Committee’s minutes this morning, which suggested that some additional easing by the Bank of England may be coming in the future.

24-Hour Price Action

Key Levels: 14:10 GMT

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 9887.42 at the time this report was written, after opening at 9843.12. The index has traded mostly higher, with the high at 9894.11 and the low at 9834.68. This is only the index’s third advance of two days or more this year.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line “Distribution List” to cvecchio@dailyfx.com

Article source: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/top_fx_headlines/2012/02/22/U.S._Dollar_Momentum_Builds_as_Greek_Concerns_Linger.html

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.40 percent higher from the open after moving 104 percent of its average true range, and the shift away from risk-taking behavior should prop up the reserve currency as renewed fears of a Greek default drags on trader sentiment. However, as the 30-minute relative strength index falls back from a high of 72, it looks as though there will be a short-term correction before another move to the upside, and we will be closely watching the upward trending channel from earlier this year as the index struggles to push above 9,900. In turn, the USDOLLAR may fall back towards the lower Bollinger Band (9,839) going into the end of the week, but we maintain a bullish outlook for the greenback as the recovery in the world’s largest economy continues to gather pace.

Although the existing home sales report for January struck a mixed outlook for the housing market, the more robust recovery in employment paired with the ongoing expansion in production should help to encourage a stronger recovery, and we expect the Fed to further soften its dovish tone for monetary policy as the outlook for growth and inflation improves. As we’re expecting to see a slew of positive developments coming out of the U.S. economy, the data should curb speculation for another large-scale asset purchase program, but the event risks could fuel risk-taking behavior, which would dampen the appeal of the USD. Nevertheless, we will be watching for a close above the 50-Day SMA (9,884) to reinforce our bullish forecast for the dollar, and we may see the index make another run at the 78.6 percent Fibonacci retracement (10,118) as the Fed comes closer to concluding its easing cycle.

The greenback advanced against three of its four components, led by the 0.70 percent decline in the Japanese Yen, and the bearish sentiment underlining the low-yielding currency may gather pace over the near-term as the fundamental outlook for the world’s third-largest economy deteriorates. Indeed, the widening spread between U.S. and Japanese bonds has fueled the recent rally in the USDJPY, and the pair looks poised to appreciate further during the first-half of 2012 as the Bank of Japan expands its easing cycle. As Japanese policy makers scramble to stem the risk for deflation, the BoJ may continue to ramp up its asset purchases over the coming months, but the weakening outlook for the region is likely to produce headwinds for the Yen as market participants see the central bank maintaining the highly accommodative policy for a prolonged period of time.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Join us to discuss the outlook for the major currencies on the DailyFX Forums

Article source: http://www.dailyfx.com/forex/fundamental/us_dollar_index/daily_dollar/2012/02/22/USD_Index_To_Resume_Upward_Trend_Japanese_Yen_Weakness_To_Accelerate.html

Along with efficiency comes the dynamic nature of risk tolerance. At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor. (Read how to determine What Is Your Risk Tolerance?)

Academic Understanding of Risk
In the plethora of free resources, risk is treated too benignly. The term “risk tolerance” has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. It’s much more than that.

Risk is a behavior that is hard to understand rationally because investors often act opposite of their best interests. A study conducted by Dalbar, Inc. showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.

Since risk is a behavior, it’s extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. Day traders, often seen as having a high risk tolerance, may actually have an extremely low tolerance because they’re unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. That’s hard to do when you’re working with your own money.

Efficient Market Hypothesis
Do you know how likely you are to out invest the overall market? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?

Efficient Market Hypothesis (EMH) might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or fair value.

For the retail investor trying to pick individual stock names hoping to achieve gains that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits, but over a sustained period of decades, this strategy breaks down, say the proponents of EMH.

Even the brightest investment minds employing teams of researchers all over the world haven’t been able to beat the market over a sustained period. According to famed investor Charles Ellis in his book, “Winning The Loser’s Game: Timeless Strategies For Successful Investing.”

Article source: http://feeds.investopedia.com/~r/InvestopediaArticles/~3/-baTxpvQ_2A/manage-your-own-money.asp