Last Updated Dec 29, 2009 10:12 AM EST
- Increase inflows after observing periods of strong performance, buying at high prices when future expected returns are lower
- Sell after observing periods of poor performance, when future expected returns are now higher
On March 10, the S&P 500 Index began its greatest rally since the Great Depression. However, investors were once again demonstrating that financial writer Jonathan Clements was right when he stated: "If you want to see the greatest threat to your financial future, go home and take a look in the mirror."
Morningstar's director of research Russ Kinnel provides us with some examples of how investor behavior destroys returns. Kinnel showed that "even when the official returns look pretty good, investors' performance can be lousy." For example:
- The JPMorgan Intrepid Multi Cap Select fund returned 28.2 percent in the 12 months ended November. Unfortunately, the typical investor earned just 8.1 percent.
- The Fidelity Mega Cap Stock fund returned 28.7 percent for the year through November. Unfortunately, the typical investor earned just 16.8 percent.
The 2009 rally provided another example of the need for discipline and patient persistence. After closing at 677 on March 9, the S&P 500 had risen 27 percent to 857 by April 9. Just one month later on May 8, the S&P 500 had risen to 929, a two-month gain of 37 percent, or about 60 percent of the total rally. And despite the huge rally, investors were pulling money out of equity funds in 2009.
The evidence is clear that market timing is a loser's game. Investors are best served by having a well-developed plan (including a rebalancing table), adhering to it and ignoring the noise of the market and the resulting emotions.
And when it comes to market forecasts and gurus, investors would be well served to remember J. Scott Armstrong's Seer-Sucker Theory on Expert Forecasts: "No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers."