Don’t Let Emotions Guide Your Investment Moves
Are you guessing about getting in or out of the market? Or are you now sitting on the sidelines? Many people are these days, and it can have serious consequences. The biggest issues for investors are fear and greed. Both play with our emotions to justify a move one way or the other.
Market timing is an attempt to forecast the market’s direction, pulling money out in anticipation of a downturn and reinvesting when it seems likely that prices will move higher. The events that move markets are usually unpredictable. Therefore, market timing is a risky approach that could have a significantly negative effect on a portfolio’s long-term performance.
For even the most seasoned equity investors, 2008 was a tough year. Problems in the banking sector related to the availability of credit, combined with a slowing economy, caused problems in the markets that inspired many investors to seek safer ground.
However, investors who fled stocks in October 2008 after a painful eight-day, 23 percent slide in the S&P 500 may have also missed a major 12 percent one-day gain that followed on Oct. 13. Episodes of falling prices can be clustered with episodes of rising prices.
Because no one can predict exactly when the markets will fall sharply or begin to rise again, investors who try to time the market often make emotional decisions that cause them to sell at market lows and buy again later after missing the opportunity for significant recovery.
A study of the S&P 500 index by The Hartford in its publication Beyond Investment Illusions shows that from Dec. 31, 1977 to Dec. 31, 2007, the index performed at 12.8 percent. If over that 30-year period you had missed the 20 best days, your return would have been 9.4 percent. Studies vary over the industry, but many have been done to prove that the average investor’s actual returns are only about half the index, due to making changes when they shouldn’t. This is where having some perspective — or working with someone who does — may pay dividends for you and your financial future.
If bouts of market volatility have led you to question your risk tolerance, or if your personal financial situation has changed, some adjustments to your portfolio’s asset allocation may be warranted. Even so, it may be wise to carry out any changes over a period of time to avoid emotional decision-making.
The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.
1) Yahoo! Finance, 2008. S&P 500 for the month of October 2008. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.
2) Beyond Investment Illusions, The Hartford, October 2008
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