Buy-and-hold and market timing are two investment approaches that seem to be polar opposites in terms of philosophy and execution. Yet proponents of both strategies can make historical arguments for their validity by pointing to the positive results of investment professionals. Unfortunately, it appears the majority of non-professional individual investors, often referred to as “retail customers,” don’t seem to be able to use either approach effectively. They don’t hold what they buy, and they mis-time their transactions.
As a result, retail investors have a tendency to sell low and buy high, an approach that almost always diminishes gains and frequently delivers losses. Studies tracking investor behavior consistently find that returns for the majority of retail investors are significantly lower than market indices, and the same holds true when their returns are compared to funds that use either buy-and-hold or market timing strategies.
There are obvious explanations for retail investors’ not achieving better results. Some people don’t have the belief or emotional makeup to handle the repeated fluctuations that come with a buy-and-hold approach. Others may not have the time, expertise, or discipline to successfully execute timing strategies. But the biggest challenge for most retail customers may be the inability to acknowledge their incompetence as investors; they keep making the same mistakes.
Since bottoming out in March 2009, equity markets have experienced the “most uncelebrated bull market in history,” according to research director Tony Ferriera in a Reuters article. How much of a bull market? Through April 1, 2014, Louis Basenese of the Wall Street Daily reported the S & P 500 index had gained over 130 percent in the past four years. Sounds like a good period to have been invested, right? Unfortunately, many retail investors were leaving the market instead of getting in.
In an article for Investor Insight, Gary Hulbert cites data from the Investment Company Institute showing mutual funds had huge redemptions in 2008 and 2009, which is understandable, given the losses investors were incurring. However…
“This pattern of outflows continued in 2010 and even beyond. In fact, ICI reports that there were net outflows from domestic equity mutual funds in 21 of 24 months in 2011 and 2012. Net inflows to equity mutual funds didn’t turn positive until January of this year. These data prove that millions of investors missed all or most of the bull market in stocks that began in early 2009. Likewise, many are only getting back on board now with the Dow and S&P 500 at all-time record highs… Selling low and buying high.”
A Wall Street Journal article titled “Mom and Pop Run With the Bulls” personalized this self-defeating individual investor behavior with the example of a Houston couple, both doctors, who felt “sucker punched” by the losses they sustained in 2008 and 2009. They swore off stocks, putting their savings in a bank. But after seeing the indexes push to record highs, “they took the plunge back into the market.” Why now? “We just didn’t want to be left on the sidelines,” said the wife. And thus, another example of selling low, buying high. Can anyone say “Déjà vu all over again”?
To be clear: The problem isn’t the stock market. Intelligent investing can deliver substantial returns, and result in significant upgrades in one’s financial well-being. But like many other big financial decisions (starting a business, buying a home, beginning a life-insurance program), buy-and-hold and market timing approaches to investing require discipline and a willingness to stay the course long enough to see results. Many individual investors sabotage their chances with impulsive decisions based on immediate distractions.
If you have been an individual investor in the stock market, now might be an opportune time to assess your past performance. (Remember, we are in the midst of an “uncelebrated bull market,” so the current numbers should look good, right?) Ask yourself some simple questions, and be honest with the answers:
Do you have a defined investment strategy? Do you stick to it?
Have you bought high and sold low in the past?
Has your investment performance come close to matching that of indexes or comparable funds?
Based on past experience, what needs to change to improve your results?
Should you consider getting more input from expert sources?
In the Wall Street Journal story referenced above, the Houston couple said this time they were hiring a financial adviser to help them with their investment plans. This decision may be beneficial, because while it is possible to make individual investing a do-it-yourself project, an informed third party can be a voice of reason that keeps you from repeating past mistakes.
One definition of insanity is doing the same thing and expecting a different result. Keep your sanity—and your money—by changing your investor behavior.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected]. See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor M. Preil
