« 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 |