Timing is Everything – Investors Who Sold at the Bottom Piling Into Stocks Now?

by Darwin on February 28, 2011

With major market indices just about doubling in less than two years from the market bottom following the financial crash, retail investors are finally starting to pile back into stocks.  Talk about timing, huh?  I was blown away by my friends and colleagues who were proclaiming in 2009, “I’m out!  I’ve had it!  Wall Street is a giant scam.  I’m never owning a stock again”.  With that, they moved 6 figures in retirement account funding into money markets and in some cases, bonds – but no stocks!  I don’t give out investing “advice” per se, I just tell people what I’m doing and why I’m doing it.  And I said with a time horizon of 25-30 more years until retirement, I’d gladly stay in risky assets with a higher assumed rate of return than lose money to inflation.  But alas, millions of Americans who followed the herd out of the market at the bottom have a nice 5% – 20% (depending on what their bond mix was) vs. the 100%+ the rest of us are looking at when factoring in dividends and capital appreciation.

When Herding Hurts

The Wall Street Journal had a good article on this phenomena this weekend.  To quote Jason Zweig, what he found is that “many investors who are aggressively getting back into stocks are the very same people who fled the equities markets in…2008-2009… just before it embarked on a historic rally”.  So, it’s not just anecdotes from me personally.  This is what financial advisors and money managers are seeing.  In many cases, investors are going back into the market with an even higher portion of assets in stocks than before the crash!  That defies logic.  But investing is emotional for many.  For anyone who’s been in love, angry, jealous or elated, you know that logic can take a back seat to emotion with embarrassing and regretful consequences.  The feeling of missing out on something is so overwhelming that many find it difficult to resist.

Pick a Strategy and Stick To It!

This isn’t to say that I’m some sort of market genius and I’m thumbing my nose at these poor market timers.  For all I know, we could see another 50% leg down in 2011.  The reason I stay virtually fully invested in stocks is because my time horizon is so long that I anticipate stocks will outperform any other conventional asset class over that period of time.  If I were using my funds to start a kid off in college in 4 years, I wouldn’t be 100% invested in that account – more like 50-60% probably.  If I were close to retirement and needed to rely on that nest egg, I’d have much less exposure to equities.  But I have all the time in the world for stocks and reinvested dividends to go through volatile perturbations as long as they outperform cash and bonds which isn’t a stretch.  Granted, bonds had a strong run since they too, were coming off a near-collapse.  But with the Fed Funds rate as low as it’s going to go and the economy recovering, savings accounts are terrible and bonds don’t appear likely to return to recent highs.

Many people console themselves with the notion that “they can sleep at night” and the risk of loss is more damning than missing out on market gains.  That may be true for many.  But they need to bear in mind inflation will likely pick up at some point and erode those meager fixed income returns so they can choose death by a thousand cuts or suffer through volatility in stocks, but there’s no easy path to real returns that exceed inflation by a meaningful amount.

 

Did You Panic in 2009?

What Are Your War Stories from the Financial Collapse?

 

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{ 4 comments… read them below or add one }

1 Roger Wohlner February 28, 2011 at 8:45 pm

Excellent post, I never cease to be amazed at the ability of so many investors to do so much harm to their nest eggs by insisting on buying high and selling low.

[Reply]

2 Dominque March 1, 2011 at 8:15 am

Well sell your products low @ http://www.xogie.com The new virtual auction site so come check us

[Reply]

3 Evan March 1, 2011 at 3:56 pm

I think the most important thing is to be true to yourself. If your (The particular investor) risk tolerance was low you probably wouldn’t have gotten killed in the downturn and wouldn’t need the upturn.

I am around your age so I, personally, kept just putting money away

[Reply]

4 Joe Schmoe March 3, 2011 at 5:23 pm

Mr. Darwin,

Are you still writing calls and can you share your experiences with us? – Thanks so much.

Joe

[Reply]

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