Fear and Greed, mutual fund investors biggest problem.
I was getting my haircut this morning at my local Portland, Oregon barber shop, to preserve identity I won’t say exactly where, but the barber was asking “how was business?” I told him the truth, business is great, I work with an excellent team of financial advisors, lawyers, CPAs and this “crash” has cause people to come to grips with the sad reality that there is no “hot stock”, just good planning and an asset allocation that lets you sleep at night. Sorry to say investing is just not sexy, as hard as the financial industry tries.
About this time he tells me that he was “pissed” and cashed out his mutual funds in December and has only recently bought AIG and Bank of America shares. I think to myself that I don’t want to have anything to do with someone who “invests” this way and try to change the subject. It didn’t work. He asked me what I thought and I told him as politely as possible, “I think you are gambling with your money, those stocks could crash to near zero tomorrow and you could be left with absolutely nothing.”
Maybe its just that we have grown to know each other a little bit, one haircut at a time, but it made me realize that he was just following the same group think that others were following just a more extreme version and really he didn’t have someone who could help him out with his needs. Anyways it ended up I’m going to sit down with him in a couple weeks and put together a financial plan that won’t cost him anything and will be a benefit to his retirement. I’ll post in the future as to how it goes.
So having said that here is a 2003 DALBAR study that should be a required reading for every investor.
Motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns. Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation.
Investors are not swayed by major political events. The market is the force driving the behavior to hold equity funds for a little over two years – shorter even than the average for fixed income funds.
• The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually for the last 19 years.
• The average fixed income investor earned 4.24% annually; compared to the long-term government bond index of 11.70%.
What’s the point? Get financial advice either through a financial planning advisor or your own study. Make a solid financial plan and stick to it. Make your money on giving great haircuts and invest your money for retirement.
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