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03/23/2008
--- Market Timing Usually Leads To Disaster
Want to boost your portfolio's
long-term profits by 41%? Then don't try to time the market.
That is the conclusion reached by
DALBAR Inc., a mutual fund research company. The firm compared
two scenarios over the last twenty years:
The end result? The investor who ignored
the ups and downs of the financial markets and consistently
invested a fixed amount into the stock market each month had
investment profits 41% higher than the investor who
tried to guess when the market was going to go up or down.
Why such a big difference? DALBAR states
that, "Investors are motivated by greed and fear – not
by sound investment practices. Close examination of investor
behavior reveals that as markets rise, investors pour cash
into mutual funds, and a selling frenzy begins after a decline.
Tracking the dollars going into and out of mutual funds over
a given month compared to market performance proves the correlation:
as markets rise, cash flows swell; as markets decline, cash
flows deflate."
Research by Russell Investments also found
that investors poured money into the stock market near market
tops and withdrew money near market bottoms. February of 2000
saw the largest-ever net inflows of money into stock mutual
funds. The very next month the stock market reached its peak
which was the start of one of the worst declines in history.
With perfectly awful timing, investors had once again incorrectly
guessed the direction of the market.
The same bear market bottomed
out in October 2002. Some of the largest outflows from the
stock market occurred in the few months preceding October,
meaning many investors were once again timing the market
in the very worst way.
The next time fear or greed
grips you when investing, think twice about giving into
your emotions when it comes to trying to time the market.
The odds are you will do much better consistently adding
to your investments regardless of the market outlook.
DALBAR's study concludes
with some wise words for investors, "Start early, keep
contributing and don’t panic."
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