Buy, Hold, and Sell!

Chapter 12Buy-Hold Myth #3: Don't Be the Fool Who Sells at the Bottom

In 2011, the average equity fund investor underperformed the S&P 500 by 7.85 percent. Dalbar, the nation's leading financial services marketing research firm, found that the typical equity mutual fund investor suffered a loss of 5.73 percent, while the S&P 500 gained 2.12 percent. In a March 2012 press release, the Dalbar researchers said, “They (investors) decided to take their losses instead of risking further declines. Unfortunately, as is so often the case, this occurred just before the markets started on a steady trek to recovery.”

Sounds like those investors were fools who sold at the bottom of the market, doesn't it? According to Dalbar, which conducts similar studies each year, this is not unusual behavior. Investors get nervous when the market drops. They may tell themselves to stay the course because they're long-term investors, but they feel the loss of every cent as the market plummets. Eventually, they can't take the anxiety anymore. They panic and sell, often near the bottom of the market. And since history tells us that the market bounces back nicely the first year after a bear market, those investors lose out on the typical rebound. By reacting emotionally, the “fools who sell at the bottom” are shooting themselves in the foot. These investors, indeed, would have done better in the market had they stuck with buy-hold.

Am I saying that “don't be the fool who sells at the bottom” is bad advice? ...