Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Investors Are Becoming More Knowledgeable!

Stock-Markets / Stock Markets 2010 Aug 07, 2010 - 02:11 AM GMT

By: Sy_Harding

Stock-Markets

It’s quite discouraging to look at the historical performance of public investors.

For instance, the most recent annual study by research firm Dalbar Inc. shows that over the 20-year period ended December 31, 2009, the S&P 500 Index gained an average of 8.2%, but the average equity investor had an average annual return of only 3.2%. Of course, the word ‘average’ is very misleading. Over that 20-year period the S&P 500 was up as much as 50% in individual years, down as much as 40% in others, providing ample opportunity for market-timing strategies to buy low and sell high, and so not only match but outperform the index.


Yet, although well aware that the basic rule or goal of investing is to buy low and sell high, there has always been a strong pattern of investors becoming more encouraged and bullish near market tops, therefore engaging in more buying at higher prices, and more worried and bearish when significant corrections have been underway for some time, and so engaging in more selling at low prices.

Wall Street is partly to blame. As a stock-broker friend once told me it is far easier and more lucrative to sell an investor what he or she wants, a stock or mutual fund that has already gained 50% or 100%, which has everyone excited about it, but may be overvalued and have limited further upside, than to try to convince them to buy a stock or sector that is down 50% and ‘out of favor’, even though it may be undervalued and close to a bottom from which it will soon begin its own big rally.

Another form of ‘chasing performance’ and buying high, can be seen in the popularity of choosing stocks and mutual funds from the lists of those with the best performances of the previous one to three years. How popular is the strategy? The Investment Company Institute says that 88% of mutual fund buyers cite a fund’s previous performance as the primary reason they choose one fund over another.

Does it work?

John Rekenthaler, vice-president of research at fund-rating service Morningstar, puts it this way, “Investors piling into the hottest funds of the previous three-year period will be sorry, as studies show they tend to underperform over the next period, while the lower ranked funds tend to be the winners over the next three-year period.”

It’s discouraging to go back 100 years and more, after all the books that have been written and efforts that have been made to educate investors, and see the destructive patterns have never changed.

And yet this year there have been encouraging signs that public investors are indeed becoming more knowledgeable about how the market works, and seem to have done a better job with their timing.

Investors poured money into equity mutual funds in the first four months of the year, and then began moving it back out in May as the market began to top out. Since May more than $40 billion has been taken out of equity mutual funds.

More recently, even though the market was up 7% in July, trading volume tumbled as institutional investors (large pension plans, insurance companies, investment banks) and many hedge funds sat on their cash and did not participate.

And it appears that retail investors took the same approach as the institutions and professionals, right or wrong, and were also not enticed back in by the higher prices, in fact seem to have sold into the rally, lightening up even more. Investors pulled an additional $9 billion from equity mutual funds in July, selling into the strength.

It remains to be seen whether the institutions and professionals will be correct in expecting the July rally to have limited upside before the correction resumes. But this time investors seem to be following their lead rather than the always bullish lead of Wall Street.

Investors have also been pouring their money into bonds, and while many analysts, including myself, are concerned that a bubble may be forming in bonds, so far it has been working out. Hopefully, it’s another indication that public investors are becoming smarter, more knowledgeable. That would be bad news for Wall Street but good news for investors.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in