| WASHINGTON, March 6
WASHINGTON, March 6 The Dow Jones Industrial
Average rallied to a record high on Tuesday, and if you are
anything like the typical investor, that made you want to race
out and buy stocks.
That is the typical and self-destructive buy-high, sell-low
pattern of individual investors. "When the markets are doing
well, people are much more interested," said Charles Rotblut of
the American Association of Individual Investors. "There's a
definite correlation between the market rising and people
investing, and the market falling and people selling."
Mom and pop did start to put money into the stock market in
January and February, when the Dow rose 7.2 percent, according
to data from Lipper, a Thomson Reuters (TRI.TO> company,
and the Investment Company Institute, a mutual fund industry
But before then, individual investors spend the better part
of the last four years staying away from stocks, after being
spooked by the 2008 credit crisis and subsequent stocks selloff.
From June 2008 through December 2012, investors pulled $399
billion from stock mutual funds, with most months showing net
withdrawals, Lipper reported.
This fear-sell, greed-buy cycle really hurts the nest eggs
of the people who are stuck in it. Investment research firm
Morningstar has analyzed how individual buy/sell decisions
affect returns and the results are disturbing.
Over the last 10 years (through Jan. 31), U.S. stock mutual
funds reported total returns of 8.77 percent a year. But
individuals in those funds actually earned 7.76 percent a year
because they bought and sold at the wrong time.
Put another way, if you started with $50,000 and let it
ride, you'd end the decade with $120,171. If, instead, you
matched the typical fund investor's trading patterns, you'd end
up with $108,629, or $11,542 less.
"That's not because people are picking bad funds," said
Morningstar's vice president of research, John Rekenthaler.
"It's because people lack discipline when it comes to asset
The spread between individual returns and regular fund
returns was even bigger for other asset classes: Commodity funds
returned 6.37 percent annually over 10 years, but investors in
those funds earned only 3.58 percent a year.
All funds earned 7.54 percent a year during that 10-year
period, while individual investors earned 6.12 percent, cutting
their returns by 19 percent via bad buy and sell decisions.
But it's not yet time to run for cover. With a lot of money
still on the sidelines and in bonds, and with many analysts
saying they still haven't seen the exuberance (rational or
otherwise) that typically marks a market top, you probably still
have some time to make rewarding stock purchases. "This may be a
jumping point to ever higher numbers," said Jeff Tjornehoj of
Here's how to grab the momentum without getting carried away
* Stick to your plan. Figure out what portion of your
long-term nest egg should be in the stock market, based on your
time horizon and risk tolerance. Then put it there and keep it
there, says Tjornehoj.
* Consider valuations. The Dow and other market indexes
still are not expensive by historic measures. On Tuesday, it
traded at roughly 15.87 times expected 12-month earnings,
compared with 16.99 during the 2007 highs, according to Thomson
* Don't be shocked or scared away by a reversal. "We view a
3 percent to 5 percent pullback likely in the near term," said
Brad Sorensen, director of market and sector analysis for
Charles Schwab Corp. That could present a buying
opportunity for the aforementioned folks underinvested in
* Cherry pick. The higher prices go, the better it is to
focus on specific stocks and sectors that still may be the most
rewarding. For example, the Dow represents old-line
dividend-paying behemoths, many of which were considered the
safest stocks to buy during the fear years. The Nasdaq, by
comparison, is driven by technology stocks that still have not
surpassed previous highs and may hold more promise, according to
some analysts. "We continue to like tech due to attractive
valuations and companies loosening their purse strings as they
become increasingly confident in the economic recovery and
willing to invest in efficiency enhancing tech," said Sorensen.
* Don't assume your adviser will protect you. Since the
credit/market crisis of 2008, many financial advisers have been
following their clients instead of leading them. As worried
investors called, their brokers and fee-only advisers channeled
them to bonds and fixed annuities and other "safe" investments
to calm those fears. The Morningstar research that looks at how
funds perform versus how investors in them do? "Nothing we've
seen suggests that there is a difference between the
adviser-sold funds and the direct retail funds," said
* Remember that discipline. Maybe, as Rekenthaler believes,
the end of this bull is still two or three years into the
future. When that happens, bear in mind that the people who were
really making money today were buying in 2009, when the
proverbial blood was on the street. As Tjornehoj put it, "It
would have been better to get in three years ago."