Now You're Buying Stocks -- Your Timing Couldn't Be Worse

This was predictable.

As stocks hit all-time highs and bonds begin to fall, retail investors are buying stocks and selling bonds for the first time in years.

This data from the Investment Company Institute shows the flows in and out of mutual funds:

Source: Investment Company Institute

This excludes ETFs and individual stocks. But TD Ameritrade tracks its client activity, and recently wrote: "Clients ramped up their equity market exposure as they were net buyers of equities and sold fixed income mutual funds and ETFs."

A quick reminder: For the market as a whole, money doesn't actually flow into or out of assets; there's a buyer and seller for every trade. What changes is the price of the most recent trade.

But we know that investors consistently play this dance the wrong way. They get excited when stocks rise and rush out to buy more, and sell with abandon when markets head down. Old justifications for staying out of the market melt into justifications for getting into stocks now. Josh Brown wrote yesterday:

Everybody is unmasked and shown for what they truly are: Performance-chasing children who grow resentful at the thought of anyone's portfolio outpacing theirs, no matter how much risk is being assumed. Screaming chimpanzees rattling the bars of their cages when the colors and lights start flashing.

"I know I said I wanted to treat this capital responsibly and tune out the noise-but why the hell don't I own those hot stocks that keep going up every day?"

Portfolio stewardship is great but that's not what you want when the market rallies. What you want is to beat that index when it goes up. What you want is an ego stroke, you want bragging rights and you want to be in the game, not watching it. It's only partially about the money, it's more about being right.

We've written about the hazards of buying high and selling low ad nauseum. But it's the most common mistake investors fall for. And while stocks probably aren't a bad buy at current prices, the destructive behavior of poor timing erases most of the long-term value markets offer over time. The average individual investor underperforms the S&P 500 (SNPINDEX: ^GSPC  ) by nearly six percentage points per year. Quarterly earnings, employment reports and head-and-shoulder chart patterns don't matter. This does. It is literally the most important investing topic that exists, and can't be discussed enough.

If you're one of the investors who's been sitting in cash or bonds for the last few years and just now wants to jump back into stocks, ask yourself two questions:

What are you going to do when the market falls again? Because it will. Unless you truly know that you'll act differently the next time stocks plunge, reassess what you're doing, or whether you have the temperament to be investing at all.

What are you goals? Is your goal to beat the market this month? This quarter? Over the next 10 years? Not at all? Is it to retire next year, or 30 years from now? Is it to outperform your brother-in-law? Are you doing it just for fun? Few ask themselves these questions, but how you answer them can dramatically change how you invest and think about market moves.

Investor Bill Bonner once said, "People do not get what they want or what they expect from the markets; they get what they deserve." Keep this in mind if you're shifting assets into the market now that stocks are at all-time highs. 


Read/Post Comments (20) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 26, 2013, at 10:25 PM, MartyTheCanuck wrote:

    I love the last quote : People get what they deserve. Just LOVE it.

  • Report this Comment On July 27, 2013, at 12:15 AM, Yearthreetrading wrote:

    This is poorly written. The message you are trying to convey is vague and rather weak.

    If you are an investor and this article really gets you thinking about proper investment strategies... You probably shouldn't be investing. Otherwise I think there is not enough information for this article to be useful.

    Sorry for the rude comment, but sometimes people just write to be heard.

  • Report this Comment On July 27, 2013, at 2:08 AM, systemBuilder wrote:

    This is why the leeches on Wall Street want every American to fancy themselves an "investor". They know they can sucker 90% of all Americans, if only they can trick these people into thinking they can be invest their way into "the monied classes".

    Remember, 90% of all the people who get rich in America aren't the ones buying stocks, they are the ones CREATING stocks and companies, and SELLING OUT with IPOs. For the other 320 million of us, we live on the bread crumbs left behind by those so called "capitalists" ...

  • Report this Comment On July 29, 2013, at 1:32 AM, shaun1776 wrote:

    The market as a whole is very overvalued by several measures: see US CAPE and q chart at http://www.smithers.co.uk/page.php?id=34

    However, there are individual stocks that are not overvalued such as one of my holdings BRK-B.

  • Report this Comment On July 29, 2013, at 5:36 PM, Sotograndeman wrote:

    Agree with Yearthreetrading.

    The article is not only embarrassingly superficial, but it 'lectures' as if everyone reading it is an idiot member of the herd.

    Yet another (unsuccessful) attempt by TMF to look like knowledgeable and successful investors. Long long way to go, guys!

  • Report this Comment On July 29, 2013, at 6:14 PM, akutach wrote:

    I'll go to bat for Morgan.

    This article is not for everybody. It is a very good perspective piece for anybody who hasn't invested through two full cycles of the market (and especially those who've been around less than one cycle), and reflected on their actions at good and bad times as a the ground work for performance and emotions during the opposite phase.

    It has been said before, but does warrant repeating. I find articles such as this function like my mantra to focus on the possible ramifications of my risk exposure. I do think about exposure in terms of how will I feel about holding a position 3-5 years through a bear market and back up even if it is a 0 return regardless of how it performs next to a benchmark. Is that acceptable? Should it be? Will I balk at the bottom if I know XYZ is the type of company that will likely drop 70% on its way to a net triple?

    If a reader doesn't, they're likely to double their jeopardy when they find that they're the type to buy the hype and sell the fear, and worse yet, do it all over again 5-7 years later having failed to understand why they do it at all.

    Yes, we should all be introspective and self-critical. And then plan for a day when everything is on sale except the cash in your account, and how to keep cool enough to do the things we know that we ought to do.

    alan

  • Report this Comment On July 29, 2013, at 6:44 PM, mclaugph wrote:

    If the point of this article was to prove that Joe Investor chases performance, fine. If the point of this was to suggest that people are buying high now and lowercase-f fools, then I'm confused.

    Recent articles by Mr. Housel suggest that if you buy now, it won't matter if you plan to hold for a timeframe of several years:

    http://www.fool.com/investing/general/2013/07/24/buy-and-hol...

    http://www.fool.com/investing/general/2013/07/17/the-market-...

    So...did Morgan have a change of heart, is the article unclear, or did the editor make a request for something to stir up FUD and web traffic?

    That said, most stocks I'm interested in are a little expensive so I've started turning other stones.

  • Report this Comment On August 02, 2013, at 12:45 PM, gene132 wrote:

    Funny, but the Fool always says "don't try to time the market". I submit that this is really the only way to make a lot of money. Unless you are a "By and hold" billionaire like Warren Buffet, it is critical that you get in and out at favorable times. Right now, it looks like things will be good for the next 18-24 months. After that, as Obama fever disappears (and the real possibility of a recession looms), the smart money will be leaving equities.

  • Report this Comment On August 02, 2013, at 1:09 PM, Eastbchguy wrote:

    MOTLEY FOOL Editors please read.

    I thought I was here to learn about picking stocks. Not to "play" the market. To the Motley Fool editors who told or suggested that Mr. Housel write this article. I want you to know I prefer articles that research companies. If you are listening or reading. I don't think a good editor would have let this article go to print.

    There are always individual stocks going up and those I are the ones I want to read about.

    Plus I feel any article like this should dwell on "stop losses". Mr Housel what do you say about them? What kind of stop losses do you suggest for different types of investments. This year I was stopped out of AAPL at 25% also TWO at 10%.

    Where do you set your stop losses?

    Mr. Housel Instead of general stuff I would prefer more specific info "who rides a loss to zero".

  • Report this Comment On August 02, 2013, at 2:15 PM, 619bell wrote:

    What does the Fool think about the sharp sell off in Westport (WPRT)? I believe the fundamentals are still there and I added to my position. I hope that I won't be surprised with a "Sell" notice from the Fool.

  • Report this Comment On August 02, 2013, at 3:09 PM, BentMike wrote:

    I like the way Morgan writes just fine.

  • Report this Comment On August 02, 2013, at 3:24 PM, BentMike wrote:

    Gene,

    Except for the statistically very few, but mathematically necessary lucky ones, timing the market is clearly not a successful strategy, and most people haven't the time or training to attempt it.

    If you are a timer and successful, I say you are lucky, and just wait.

    It is much surer to dollar cost average indexes (in an appropriately diverse way).

    I am much happier following the lead of successful long holders, who may never sell some stocks. Consider the Davis family if you think Buffet and Munger are the only examples of this success. There are plenty of happy, not sleep deprived, long holders who do beat the market.

    I am not one myself, because I have not weathered a downturn yet as a stock owner (I did OK in the past decade with indexes though). The stocks I own, are mostly those who I would hold tight to during a downturn confident they would resurface. The worst thing you can do is try to guess the bottom and miss the subsequent rebound.

    I saw a work up once where if you got out of the market just right and missed the bottom getting in again late by a week, you fell behind those that never twitched. Only the lucky are able to look good doing this and luck is, well, just luck; though you may be convinced otherwise. Check out "Your Money and Your Brain," by Jason Zweig.

  • Report this Comment On August 02, 2013, at 3:42 PM, leaderoftheback wrote:

    Does Morgan Housel have a point?

    Witness LNKD today.

    38¢ earnings.

    P/E Ratio: 300. FCF/EV: 150.

    Triple trading volume.

    Joe sixback probably doesn't have $23,571 to buy 100 shares of LNKD. Yet 7MM shares have so far changed hands. The greater fools are obviously many. Somebody needs to hear what Morgan is saying...and they've apparently got money...for now.

  • Report this Comment On August 02, 2013, at 3:59 PM, oldengineer wrote:

    I think everything I've read that Morgan has written has been worthwhile. Perhaps some of the negative (on the article) folks are indeed so knowledgeable that the article was a waste of their valuable time; however, I think that the article should be a helpful caution to a lot of people.

    I make it a point to read everything Morgan writes.

    OE

  • Report this Comment On August 02, 2013, at 4:21 PM, daveandrae wrote:

    @ Eastbchguy-

    Show me someone that uses stop losses, and i'll show you someone that doesn't know what he is doing.

    I know this is not what you wanted to hear but at least you now know the truth about "stop losses."

    good luck.

  • Report this Comment On August 02, 2013, at 4:31 PM, omskpicker wrote:

    After 13 years of no returns many,including this author forgot what real bull looks like.

    Retail investor is just tipping his toe,come back to me when he is fully in.

    This bull is going much higher.

  • Report this Comment On August 02, 2013, at 11:36 PM, jlclayton wrote:

    For those criticizing this article, you would do well to read what Morgan Housel writes. His articles are very good at helping investors keep a common sense view of buy and hold investing and the market in general.

    He is not advocating timing the market or going against the MF principles of buy and hold. The point of this particular article was geared mainly toward those investors who were scared out of the market during the recession and are only coming back into it now as they're watching it hit new highs. He is suggesting that those people think about why they are anxious to get back in now when prices and risk are much higher. Many of them will chase the high fliers and not put their money into well thought out investments. When the market turns down again, and it always does, most of these people will sell at a loss because they don't have a good investment thesis, they just trade on emotions.

  • Report this Comment On August 03, 2013, at 11:37 AM, TMFHousel wrote:

    Thanks to those coming in defense, and no hard feelings to those criticizing. No one is perfect, good advice to some seems like bad advice to others, and opinions of all kinds are always welcome.

    -Morgan

  • Report this Comment On August 03, 2013, at 11:37 AM, TMFHousel wrote:

  • Report this Comment On August 04, 2013, at 1:31 AM, ChrisBern wrote:

    Good article Morgan. It's clear the "dumb" money is entering the market, just as the market is re-entering the top decile of most expensive markets EVER. As shaun1776 pointed out, the market IS currently expensive (despite the one flawed comment in the article, "while stocks probably aren't a bad buy at current prices...") If one wants to know what an overpriced market is, then just base it on past history with a reliable measure such as CAPE that actually reliably correlates with future returns. Right now it's saying that returns over the next decade will be very low--probably roughly keeping pace with inflation (~2%) but no more.

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