« A Quick Look at the 2008 Performance of the Dow Jones Total Market Index Sectors | Main | Abercrombie… »
If You’re Too Scared to Invest…
By JLP | November 24, 2008
read this article published recently in Fortune.
The article, Is Buy and Hold Dead?, contains this interesting tidbit on how bad people are at timing the market:
You can’t time the market.
We’ve got proof. If you get out now, when will you get back in? “You really have no choice but to stay the course in an intelligent way,” says John Bogle, who as founder of Vanguard has been one of the great pioneers of low-fee mutual funds as a vehicle for buy-and-hold investing. “It’s one thing to get out of the market at the perfect time – how many people can do that? – and quite another to get back in at the perfect time. You’ve got to be right twice.”
The evidence shows that most investors get it wrong over and over again. According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, over 20 years through the end of 2007, the average equity-fund investor earned an annualized return of just 4.5%, vs. the S&P 500′s 11.8% return. Why? In large part because investors, chasing performance, shift money out of lagging funds and into hot ones at the wrong times. We buy high and sell low repeatedly.
Need more evidence? Go back to the dot-com bubble. In the first quarter of 2000, according to Morningstar, investors channeled $97 billion into equity funds – nearly double the total of the previous two quarters – right before the S&P 500 peaked on March 24, 2000. And in the third quarter of 2002, they withdrew $41 billion from stock funds just before the market bottom on Oct. 9. What’s happening now? Fund research firm TrimTabs reports that investors pulled some $56 billion out of mutual funds in the first ten days of October, when the market was already 25% off its high.
It’s true…people always bail AFTER the market has dropped. What good does that do? Sure, some people have no choice if they have to sell to repay a margin loan or something like that. But, my guess is that LOTS of people are not under those circumstances and they simply allow fear to get the best of them.
Topics: Investing | 9 Comments »
November 24th, 2008 at 12:23 pm
no one can time the market because no one can tell the future.
always remember this when you invest your money.
November 24th, 2008 at 12:40 pm
Thanks for this post! It’s helpful to have someone confirm what I’ve been thinking.
November 24th, 2008 at 1:08 pm
While I think fear of actually getting into the market keeps a portion of the population out of the market, I’m not convinced that this is actually the thing that keeps them out most the time. That is, I entirely agree that once in the market, people behave irrationally and are reactionary to their fears. But prior to entry, I think lack of education and the overwhelming choice associated with entering the market are actually what drive the process.
Indeed, one way to think about the fact that investors are under-performing is not that they are making bad trades, but that they aren’t trading at all: a shocking number of people leave there retirement in money market accounts simply because the choice of mutual funds is overwhelming. Some great work by Sheena Iyengar and others shows this nicely and is worth a read.
November 24th, 2008 at 1:44 pm
Buy and hold is market timing! Presumably, you buy and hold for a long time like 20 or 30 years right then you’re supposed to sell and convert to bonds aren’t you? Isn’t this a pre-determined market timing?
We ALL know that 78 million boomers are going to retire over the next decade and we all know that they should be rolling their money over into bonds and away from stocks right? How stupid do you have to be to NOT realize this? Market timing isn’t that hard to do if you pay attention. Buy and hold really is for losers….
November 24th, 2008 at 2:39 pm
Feat plays a large role in people’s financial decisions. When trusted blue chip companies that people would normally keep long term investments in start failing, it’s going to have an effect on your investing mentality. I am new to the investment game and new to the working world. I would like to get involved with investments since I am young and can put money aside for 10 yrs when the economy should get back on its feet. My question is where to specifically go into? Stocks, bongs, mutual funds? I don’t know what the best course of action to go is or where to begin researching.
Craig
November 24th, 2008 at 3:06 pm
@Rich, if they follow the advice that is pretty standard then their change will not be drastic, when they retire they still have a horizon of at least 15 years or more hopefully. Therefore some of their funds should stay in stocks, and hopefully they have been slowly shifting over from stocks. If they are 100% stocks right now it is highly unlikely they will in 2 years convert it all to 100% bonds. Now try to time when they will be moving and what percentage, and how much is being replaced by higher earnings in the current generations, that hopefully are now seeing they need it.
I know alot of people now do not expect to get any sort of retirement from work, and seriously doubt social security, so now we are saving a higher amount than they did, how are you going to take this into account?
Then start considering the effects of inflation on the market, there will be more money available in time and to keep up with it you need to grow your money to match it.
There are about a trillion other things that go into what happens, I do not have the time to study all that, or understand it, so I will go with the long term investment in mostly mutual funds.
November 24th, 2008 at 11:04 pm
Here’s my question: if you’re going to retire in 15 years, and the “experts” say it will take the market 5 years to recover, won’t you be alright? Why worry about it?
November 27th, 2008 at 2:54 pm
I am in my early 20′s so I know I have time on my side. My roommate, who is in his mid-20′s, pulled out the $10-15K he had in his 401k and put it into a money-market fund. He thinks he can time the market and will return it to stocks “when the market goes back up” – I said if he could time the market like he thinks he could, he would be working on Wall Street making A LOT more $ than he makes now… It’s emotional investing and the psychology/behavioral finance behind it shows that this is the incorrect way to do it!
November 30th, 2008 at 12:13 am
1st rule! DON’T FOLLOW THE SHEEP! This is what most people do creating a domino effect. I think its the perfect time to put your expendable income into stocks in the next couple of years especially in mining. As long as you have money to risk and don’t mind losing it all then there will be no-emotion behind your investing! Thus making sure your having a clear head for which stock you want to buy!