Investors have Lousy Timing

The June/July issue of Morningstar Advisor (a trade publication for independent advisors) contains an article about how poorly investors time their purchases of mutual funds.

The article points out that, through most of 2009 and 2010, investors moved money from equity funds to bonds. The problem is that the stock market hit a low in March of 2009 and then proceeded to mount a rather aggressive recovery.

Investors who were moving from stocks to bond were heading in the wrong direction. They sold stocks when the market was low and moved into bonds after the bond market's very long rally.

Why do investors do this? Because they are driven by emotion. In the depths of the economic crisis, investors were panicked and fearful. What do people do when they feel this way? They run away. This reaction is instinctual. Taking flight is a helpful and appropriate reaction if you are being chased by a saber tooth tiger. In fact, it could save your life. It is not helpful if you are a long term investor trying to grow your wealth.