Private Investors tend to buy high and sell Low. Are you trying to time the Market?

How have you reacted to recent market volatility? Those who have missed out on the huge gains of recent years are happy as they may get a second bite at the cherry. Those who have been invested are now nervous about the heightened volatility. Recent falls in the bond and stock markets have led some savvy investors who have been sitting on the sidelines to take notice as they look for value. Both groups are trying to time the markets, but this is a notoriously difficult thing to do.

Markets have a tendency to continue a trend, whether up or down, far longer than the average investor can patiently hold out.

History would suggest that private investors continue to get the timing completely wrong. Statistics on fund inflows would indicate that investors buy high and sell low. Just look at the chart below, which indicates US retail investor fund flows from January 2007 to December 2013. The largest outflows from equity funds were in the last month of 2008, with markets turning on 9th March 2009. The largest inflows over the period were early 2007 and mid 2013, just when markets were at all-time highs. This proves that the average investor buys high and sells low.

If we compare the chart above to the actual performance of the S&P500 over the same period, the outflows from funds almost exactly mirror the market falling and huge inflows into funds in the second half of 2013 coincide with new all-time highs for the index.

We are restricted somewhat from offering specific investment advice on a blog like this by the Central Bank so if you would like some further information on the research mentioned above or how to set up a more disciplined investment strategy for your savings or pensions which doesn’t rely on market timing, drop us a line.

Image kindly provided by www.moneylife.in.