Resist urge to sell
NEW YORK – The great hope of investors, including those who buy into mutual funds, is that they’ll buy low and sell high. But many people get tripped up on the sell high part, especially during a big decline, when it can take an iron will to resist the urge to pull out of the market.
Weak-kneed investors joined the panic party the last few weeks, when growing anxiety about inflation and rising interest rates sent stocks falling sharply, including a 214-point, or 1.88 percent, plunge in the Dow Jones industrials on May 17.
Selling tends to feed on itself as a declining market raises fears of a meltdown, in turn persuading more investors to unload their shares. But investors who sell under those conditions may soon regret such hasty decisions – investment analysts say people who hold tight to their mutual funds during a correction are usually better off in the long run.
“Individuals almost always do the wrong thing whenever there’s an extreme movement in the market,” said Charles Biderman, founder and chief executive of TrimTabs Investment Research. “If you’re really a long-term investor, and you really think the U.S. economy is going to keep heading up, invest a certain amount of money every month and forget about it. Don’t try to time the market if you’re an individual investor.”
It may seem shrewd to sell before your losses worsen, but doing so means you’re running the risk of losing longer-term profits. And, if you’re paying such close attention to the market’s short-term gyrations, you’re putting a lot more time and energy into your investments, which defeats the purpose of a mutual fund – most individuals buy into funds because they’re a low-maintenance investment designed to eliminate the need for obsessively watching the market.
“The vehicle was really created so that you’d leave the day-to-day decisions – such as which companies to invest in and at what valuations – to someone else,” said Joseph Brennan, a principal in the Vanguard Portfolio Review Group.
Another downside to selling in the midst of a correction is that it can be difficult to find the heart to get back into the market. That means you might miss out on gains as stocks rally again.
“The buy-and-hold strategy may still work, but once individual investors pull out, they don’t come back. That’s one reason why people are better off staying put through the down period. Even if they are able to time the sale, they never time the entry period right,” said Brent Wilsey, investment adviser with Wilsey Asset Management.
“You have to realize that you shouldn’t buy at an expensive time, when everyone else is buying. You want to buy when the market is down and it’s uncomfortable to buy. The hardest thing to do is convince people to buy something when nobody else is.”
The solution for many nervous investors might be to pick funds that are most likely to withstand a downturn, such as balanced funds, which are a mixture of stock and bond holdings. Another approach is to be sure your money is spread across as diverse a portfolio of funds as possible, and stop yourself from looking obsessively at your balances.