If that is indeed the secret to success, then it’s such a well kept secret that virtually no one knows how to do it. In fact, most people manage to do exactly the opposite.
In a February 28 SmartMoney column titled “Main Street’s $100 Billion Stock-Market Blunder,” financial writer Brett Arends argues that “Main Street investors have missed out on a staggering $106 billion in investment profits over the past five years by selling stocks at the wrong time.”
Those who invested at the March 2009 market lows would have now doubled their money. Sadly, far too many investors failed to profit from the rise, as they bailed out of the market in 2008 or 2009 when the going got too rough, and could never stomach getting back in. Investors have an uncanny knack for doing the wrong thing at the wrong time, as their emotions get in the way of their thinking.
Fund flows, measuring dollars flowing into and out of mutual funds, show the greatest investment inflows after market gains, as investors react to recent results by investing more at now higher prices.
And according to Arends, the major investment outflows in recent years occurred after market slumps, as investors reacted to lower prices by pulling more money out of the market.
Writes Arends, “in October 2008, after Lehman, investors panicked and withdrew about $45 billion from their U.S. stock funds. That trade alone has cost them $25 billion in investment profits since … the shares they sold for $45 billion would be worth about $70 billion (including dividends) now.”
In summary, Arends says recent years show a pattern of buying high and selling low (the reverse of what you should do), which helps explain why many investors have lost money even when the market has been flat or rising.
If that sounds like you, take steps now to become a more effective investor before you do more damage to your portfolio:
If your emotions lead you to make bad investment decisions, it may be time to hand the reins over to a professional or adopt a more disciplined strategy, like limiting your trading to once-per-quarter rebalancing sessions.
Don’t trade reactively, in response to what has already happened. Many investors place too much weight on recent trends, and assume they will continue indefinitely. That can get you in big trouble.
Forget about trying to market time. It’s like trying to guess the next number on the roulette wheel. You’re likely to end up with less than you started with.
Stick to your asset allocation and long-term strategy regardless of today’s headlines. Think of it like a long car trip from Miami to Los Angeles. If you stop the car in frustration every time you hit a red light or traffic jam, you’ll never get there. Stay on target, keep a steady speed, and you’ll be there before you know it.