I'm currently working though a book I picked up at the library. I'm impressed with it so far and would recommend it to anyone who has money to invest. It is not an easy or quick read, but it contains critically important information for the investor. With respect to small investors, Bernstein points out that they (we) fail to understand the relationship between risk and reward, and that we fail to stay the course when things get tough.
I agree that ignorance about how the markets work and inexperience with the psychological aspect of being invested in the market, are important obstacles to overcome. Like Bernstein, I feel lucky (in a way) to have experienced a good sized bear market. I watched as co-workers got excited about the dot.com stocks soaring to ridiculous heights. It was a real time lesson in human nature during the building of the dot.com bubble. The media did a great job of cheer-leading everyone on.
It was difficult to keep from getting caught up in it all. One would have had to live like a hermit in a cave not to be effected by it. I must admit that in 2000, I owned shares of Nortel for about 10 days when it was at $65, before I came to my senses and sold. Crowd psychology can draw you in even when you know at an intellectual level that it is a dumb move.
Holding on to stocks during a bear market must be the most difficult. I have not experienced it first hand but saw the effects on others. During the dot.com bear market I was selling short and buying Puts. I didn't make any money, in fact even though I had a number of profitable trades, on balance I still lost a little, but I did have more fun than those who stayed in long positions.