If you're looking for consistency in market opinion, expect disappointment. Sentiment turns on a dime these days. If you let that sentiment sway your investment decisions, you'll lose big over time.
In July and August, you would have thought the world was ending, looking at panicked investors responding to credit markets that were seizing up. Stocks plunged, and some speculated that what looked like a buying opportunity was actually a value trap for the unwise.
What a difference a season makes. Once it became clear that the stock market wasn't going to fall off a cliff, regular investors went right back to their old habits. In September, mutual fund investors added $7.5 billion to stock funds, reversing a significant move out of stocks in August. And as the Fed made its second straight rate cut yesterday, the Nasdaq reached yet another seven-year high, and the Dow and S&P find themselves back within spitting distance of all-time highs.
The age-old mistake
It's just the latest example of how investors let emotion get the better of them. Sure, it's natural to watch your account balances dropping and decide to get out while the getting's good. And it's easy for financial advisors to tell you how dumb it is to give in to your emotions.
But while selling in a panic may not be the best thing in the world to do, the real mistake investors make is to get right back into their high-risk positions once they think everything's back to normal. By buying back their stocks -- inevitably at a higher price -- they leave themselves just as exposed to future market drops as they were before. But they give up a lot of the potential reward from taking that level of risk when they sell low and buy back high.
Consider how much money you would have lost if you sold during those days of panic in the summer, and waited until yesterday's all-clear from the Fed to buy them back:
|
Stock |
Price on 8/16 |
Price on 10/31 |
Gains missed per 100 shares |
|---|---|---|---|
|
MasterCard |
$130.00 |
$189.91 |
$5,991 |
|
Baidu.com |
$168.89 |
$382.49 |
$21,360 |
|
Google |
$491.52 |
$707.00 |
$21,548 |
|
Colgate-Palmolive |
$65.44 |
$76.27 |
$1,083 |
|
Goldman Sachs |
$169.85 |
$247.92 |
$7,807 |
|
Research In Motion |
$66.01 |
$124.51 |
$5,850 |
From the way the markets are behaving, it's evident that investors believe the crisis is over -- at least for today. But that doesn't mean it won't be back tomorrow. Do yourself a favor now: Find an investing strategy that makes you comfortable, and then concentrate on sticking with it,
no matter what fortune the markets bring you.
For more on surviving the markets:
- Why winning isn't everything.
- How your brain may be costing you money.
- How everything will work out in the end.
