2006-11-08 Buy Low and Sell HighLogic tells us as investors that we should buy low and sell high. So why is it that so many mutual-fund investors actually follow a buy-high, sell-low investing strategy?
Even though investing should be an objective process, many investors get caught up in the emotion of tracking ups and downs in the market. Investor money going into mutual funds consistently rises and falls with investment performance. The temptation is to get into the market when times are good and then bail out when times get tough.
According to a recent Wall Street Journal article, Dalbar Inc., a Boston-based consulting firm, released results from a new study that concluded that in spite of the wealth of information available, mutual fund investors are not getting any better at timing the market.
Investors have a tendency to chase the market, which results in underperformance. The Dalbar study revealed that on average investors are not making anywhere near the returns of the funds themselves. For example, stock-fund investors earned an average 2.6% annualized gain from 1984 to 2002, far behind an average annualized gain of 12.2% for the Standard & Poor’s 500-stock index.
Mutual funds are typically marketed as long-term investment vehicles, with advertisements highlighting fund performance based on at least five to ten years worth of returns. Interestingly, stock-fund investors held their fund shares for a little less than 30 months, on average, during the period of the study.
According to the Wall Street Journal article, bond-fund investors tended to be more patient, with an average holding period of more than 34 months. Bond funds earned an average annualized return of 4.2%. While this beats the average stock-fund shareholder, it still trailed the 5.5% annualized gain for Treasury bills.
Investment behavior is a key component of doing well as an investor. It is critical to invest with discipline. A prudent investor should thoroughly research funds in which he/she is interested. The goal is to identify value, buy when the price is low, and then exercise patience. Once the homework is complete, an investor needs to give the market an opportunity to realize value, resisting the temptation to prematurely sell an investment when times get tough. On the flip side, discipline must be followed not to get off course and jump into the newest, hottest investment.
For investment success, an investor must stay the course. Develop a financial plan that suits your goals and objectives. Identify appropriate investments and stick with them. Remember, hasty moves can be costly.
DISCLOSURE: Any opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute WJ Interests’ judgment and are subject to change without notice. References to specific securities are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations.
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