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Recommended Stocks & Mutual Funds in the News

Below are updates of our recommended stocks and mutual funds as well as market news.

03/23/2008 --- Market Timing Usually Leads To Disaster

Want to boost your portfolio's long-term profits by 41%? Then don't try to time the market. That is the conclusion reached by DALBAR Inc., a mutual fund research company. The firm compared two scenarios over the last twenty years:

  • one investor systematically invests an equal amount into the stock market each month (also known as dollar-cost averaging)
  • the other investor invests the same amount, but the timing of the investments are made mirroring the actual pattern of the average investor during the twenty-year period

The end result? The investor who ignored the ups and downs of the financial markets and consistently invested a fixed amount into the stock market each month had investment profits 41% higher than the investor who tried to guess when the market was going to go up or down.

Why such a big difference? DALBAR states that, "Investors are motivated by greed and fear – not by sound investment practices. Close examination of investor behavior reveals that as markets rise, investors pour cash into mutual funds, and a selling frenzy begins after a decline. Tracking the dollars going into and out of mutual funds over a given month compared to market performance proves the correlation: as markets rise, cash flows swell; as markets decline, cash flows deflate."

Research by Russell Investments also found that investors poured money into the stock market near market tops and withdrew money near market bottoms. February of 2000 saw the largest-ever net inflows of money into stock mutual funds. The very next month the stock market reached its peak which was the start of one of the worst declines in history. With perfectly awful timing, investors had once again incorrectly guessed the direction of the market.

The same bear market bottomed out in October 2002. Some of the largest outflows from the stock market occurred in the few months preceding October, meaning many investors were once again timing the market in the very worst way.

The next time fear or greed grips you when investing, think twice about giving into your emotions when it comes to trying to time the market. The odds are you will do much better consistently adding to your investments regardless of the market outlook.

DALBAR's study concludes with some wise words for investors, "Start early, keep contributing and don’t panic."


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