Too many “small” investors try to time the stock market. They do not realize that investing in the market is not gambling. That is, I feel lucky today, or, time to cash in. If they would heed the words of Warren Buffet then they would not lose. Buffet states “when investing in the stock market think of it as if you were buying an entire company!” So, if you bought, say, an ice cream shop and the first 3 days it rained and poured and no one came in… would you sell the shop since the numbers looked bad for a few days… of course not. Then invest by doing your research, buy at a discounted price and as Buffet says hold on forever.
Countless study after study has shown the small investor who tries to time the market loses out. In the 10 year period January 2004 to December 2013, according to Morningstar, investors underperformed the average mutual fund by 2.5%. One big reason for the gap between investor returns and total returns is that few investors stay invested for 10 years. It is not timing the market… it is time in the market. Investors tend to get in and out of asset classes at the wrong time.
Individual investors are seen as a lagging indicator, pouring money into areas of the market after they have seen their biggest run up, and, selling out after the retrenchment.
An example, investors bailed out of stocks in 2009, at the bottom, and went into bonds, alternative investments and commodities… just as the stock market began what is now one of the strongest bull runs in history.
On the other hand, bonds, alternative and commodity funds have floundered since 2009. In 2012, $93 billion left the stock market and missed the market’s 35% rise in 2013. At the end of 2012 $101 billion went into intermediate bond funds; this category ended 2013 with one of the worst returns in the past 40 years.
How people make decisions in picking, say, a school, hospital, car or restaurant, is very detailed and unemotional. If they did the same with investments, then, they would not make the same stock market mistakes over and over again. Funny, if an investment goes up strongly over the past 3 years to an all time high, then, the masses want to get in at the top. Yes, I hear the old adage at the market top…Smart money always sells to dumb money!
For the majority of 2009 through 2012 most investors were scared of the market. As the market hit all time highs in 2013 they put over $70 billion into equity markets. Global equity allocation is at 58% which is way above the 20 year average of 50%.
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Here is a little trick for you to do to gauge the market… ask 30 of your family members, coworkers or friends what they think the market will do in the next 9-12 months. You will see a consensus. Then do the complete opposite of what they are doing… and, you will be wealthy beyond your wildest dreams.
Friends, family, neighbors and merchants in the town I live in all know what I do for a living. They all ask me what I think will happen in the market. Before I can answer they pontificate their ideas. I actually monitor the results. Funny, in 2009 I said to friends and neighbors that the market was “on sale.” Yet 95% said they were selling everything. Between Thanksgiving and Christmas of 2013 as the market hit new highs these same people were putting everything in the market (near the top).
As a wise mentor always taught me… buy low… sell high.
Discipline or Regret!
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