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Following a risky investment approach, we were unable to match market performance. Reasons are threefold. First, gains from stocks follow a random-walk approach. Gains are thus sensitive to path-dependencies. Second, we attribute our failure to match market performance to our inexperience. Third, we adopted an aggressive strategy that was not suitable in the current economic climate.
Stocks were very volatile during the financial crisis. The index might rise 20% one day with monetary authorities around the world announcing rate cuts, but might fall 30% another day on bankruptcy announcements from banks around the world. Stocks are very sensitive to news announcements -- even more so in this difficult economic climate. Fama-French developed a random walk empirical approach (1992), and we could've adopted their model. But we chose to stick with CAPM and ended up with an erroneous analysis.
We were also inexperienced with trading stocks. We did not know how to time entries and exits properly, and relied on long-term investment methods. While day-to-day traders might thrive in this harsh financial environment, inexperienced amateurs like us did not survive. Tyler Cowen (1995) explained that, on average, amateurs performed 12.28% worse than experts in the trading arena.
We also adopted an aggressive strategy. Over 95% of our portfolio was put into stocks. We should've put more into bonds and natural resources such as gold, wheat, copper, iron, silver, aluminum, hydrogen, helium, boron, lithium, carbon, phosphorus, flourine, and nitrogen, plutonium, lead, platinum.
Because of all the above reasons, our portfolio did not perform as well as we wanted it to....