Trying to “time” the stock market is hard enough. But if you’re just going to follow the herd — buying high, and selling low — you might as well just give it up.
Wait, that’s not right. You’re supposed to buy low and sell high.
But so-called retail investors — people like you and me — have a longstanding habit of doing exactly the wrong thing as we try to make the most of our savings and 401(k) investments.
Retail investors are back to buying stocks again. New data from the Investment Company Institute, the trade association for the mutual-fund industry, show that the public turned net purchasers of stock funds during the big boom at the end of last year. They invested a net $17 billion in stock mutual funds and exchange-traded funds in November, and $32 billion in December. Their biggest purchases were in the last three weeks of December — in other words, only after bullish signals from the Federal Reserve sent stock prices soaring.
I’m sorry to say this is nothing new. Fund-sales data from ICI over the past four years show a familiar pattern. Individual investors were net sellers of their stock funds during two extended periods: From March 2020 to October 2020 and from April 2022 to October 2023. Both were periods when the stock market was not doing well, and prices were often low. At some of the lowest points, such as March 2020 and last October, they sold the most.
Unfortunately, many of us were eager net buyers of stock funds during two other periods: The big boom that began in November 2020 and ran through 2021, when stock prices were high, and during the last two months.
This is, as they say, no way to run a business. Or a retirement portfolio.
There is nothing new about this. Repeated analyses from financial research firms, such as Morningstar and Dalbar, show that the public has been torching their retirement savings for decades by buying and selling at the wrong times.
Over the 30 years from 1992 to 2022, for example, the S&P 500 generated average returns of 9.65% a year.
What did the average U.S. mutual-fund investor earn on their stock funds over the same period? Try 6.8%.
That differential was enough to halve the size of your final portfolio at the end of 30 years.
There’s no great mystery to this. Our brains aren’t naturally wired for the stock market. Automatically stampeding with the herd is a really good way of, say, avoiding predators. But on Wall Street, it sends you in the wrong direction — buying when stocks are already up, and selling when they’re already down.
My late friend Peter Bennett, a great investment manager in London for many decades, frequently turned down requests from publishers to write a book about successful investing. The reason? “I could put it all on a single piece of paper,” he said. “Buy low (ish). Sell high (ish).”
Sounds obvious? Most people do it the other way around. Then wonder why they lose.
Most investors are better off not even trying to time the market. Set a basic asset allocation between stocks, bonds and (maybe) commodities. Put your monthly 401(k) contributions on autopilot. Then lose your login details and pay no more attention to your portfolio.
If history is any guide, trying to time the market is very unlikely to double your investment returns. But it may well halve them.
