Well, as we’ve learned the hard way, what goes up must eventually come down (remember technology stocks in the late 90s and more recently, real estate in the early to mid-2000s). So what did you do when that mutual fund with the stellar track record first started losing steam? Think back to 2008. Some folks checked it every day on their computer while others didn’t even bother opening their monthly statements to avoid the pain. One way or another, most people waited and hoped it would come back soon.When things got really bad, many panicked and sold out. (You won’t believe the number of people who told me that they will never invest in stocks again.) Unfortunately, they missed the chance to recover most of their losses in 2009 and 2010. When stocks eventually reach new highs and there are stories everywhere of how much money people are making, what do you think all those who said they would “never invest in stocks again” will do? And so the “greed, hope, and fear” cycle repeats itself…
The result of all this is that investors end up buying funds when they’re priced relatively high and selling when they’re priced relatively low, the opposite of what we want to do. According to the most recent Dalbar study, the S&P 500 Index returned an average of over 9% a year over the last 20 years while the average stock investor earned less than 4%. That could mean earning less than half as much for your retirement.
Investors repeat this cycle over and over primarily due to financial institutions feeding on our fear and greed. These institutions make money when money moves. This movement hurts investors and makes the brokers rich.
Please comment or call to discuss.
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