From time to time we share with you studies showing there's one mistake investors tend to make over and over again—selling their stock holdings during periods of market weakness. An article from the WSJ (paid subscription required) summarizes new research from the Federal Reserve and the University of Michigan showing the same pattern. It begins with this stark reminder:
Late in the stock-market booms of the 1990s and 2000s, more U.S. families clambered into stocks as indexes surged. Then, once markets tumbled, many households sold and took losses. Those that held on during the most recent collapses reaped the benefits as stocks nearly tripled between 2009 and today....
“One unfortunate effect of recessions and stock-market declines is they often induce people to exit the market at exactly the wrong time,” said Dean Maki, chief U.S. economist at Barclays and a former Fed researcher on consumer balance sheets. “In retrospect, anyway, the right thing to do would have been to buy more equities at the trough, not to sell equities at the trough.”
The wise thing to do is to stay the course and follow your long-term plan, the best antidote to failure that we know. (What's that? Don't really have much of an investing plan? We're here for you. Try reading "Do You Have in Place the One Financial Essential for the New Year?")
One interesting finding of the latest research: "Households with the highest education and strong portfolios to begin with were likely to keep buying stocks during the decline, they found." Hopefully, SMI readers who follow the priorities and practices we lay out, and the unemotional rule-driven strategies we teach, are among those with the "highest education and strong portfolios."
The WSJ article wraps up with a balanced look forward... even if 2015 is weak, the long-term outlook is good. But not so good for those investors who panic on those occasions when the market weakens and continue to make the wrong decisions at the wrong times.
Still, market declines continue to spook some investors into selling at huge losses.
“We haven’t come up with the solution to prevent people from doing it yet,” said Shai Akabas, an economist at the Bipartisan Policy Center in Washington who works on the center’s Personal Savings Initiative.
With 2015 almost upon us, there will be the usual number of "the stock market is doomed this year" articles that will cross your path. If you read the financial media regularly, you'll also find a counter-balancing number of "the stock market will continue to do fine this year" articles as well. Every market observer has an opinion. Many are paid to make predictions based on their opinions. That's a game we prefer not to play.
Naturally, we hold opinions about 2015, but they're limited to how you might want to allocate your portfolio among various asset classes. We'll share our "educated guesses" with you in the January issue. You'll have to decide whether/how to apply them to your situation.
We never speak with certitude about the direction of the market over the near-term. Because we don't know what the coming year will hold. And neither does anyone else.Long-time SMI readers know we consistently warn against this tendency to invest based on market expectations and forecasts. Check out the links in the sidebar at right for more on this subject.