I’ve been a financial advisor for almost 30 years now, and in that time I’ve seen a lot of people make a lot of mistakes. However, the one I am constantly amazed at is when clients insist on selling their investments and going to cash when the market is going down.
This strategy is a losing proposition for most people because it requires being right twice, and time and time again, they aren’t. You have to be right on the sell. Most investors miss this because the initial downward trend isn’t so bad and they tell themselves it is just a “blip” and things turn around. But as the selling momentum picks up they become more and more uncomfortable but again they wait hoping for better times. Finally when they look at their portfolio’s value and can’t stomach what they see, they sell, turning paper losses into real losses. Generally this occurs near a market bottom, but sometimes the drop continues.
Now the investor is in cash, feeling more comfortable and the market begins to turn around. There’s a bounce or two and then a couple of weeks of prices moving higher. The investor watches, but still doesn’t believe things have changed course. Finally prices come back and the investor looks and says that now the market is too high, so I’ll wait for a pullback before I buy back in. Pretty soon the investor looks at things and says we’re in a full bull market and I better get back in before it is over, so he buys back in, usually at a level significantly higher than when he sold out. Generally they aren’t right twice, but are actually wrong twice.
History, time and time again, shows us that the investor who “stays the course” is rewarded. From 2008 to 2012, the S&P 500 generated a cumulative return of 8.6%. That included a 36% drop in 2008 and a 26% gain in 2009. Most investors sold out in 2008, taking a beating, and missed the 26% rally in 2009 because they were too afraid to buy back in. The market has historically paid investors better returns than cash and bonds because it requires investors to endure times of volatility. Without volatility there is no reason to expect higher long term gains.
We probably sound like broken records because our message is always the same. It’s also the same message as Vanguard Group’s Jack Bogle and Warren Buffett. Stay the course.
It’s the right message.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2016 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
