The Flight Response to Market Fluctuations

Did you know that the average compound return for individual investors is substantially lower than the average compound return for the total market?  We feel the one of the main reasons for this is that investors tend to have the wrong emotions about the market at the wrong times.  For example, when the market is performing really well, investors tend to be extremely optimistic and are willing to bet everything they have.  On the other hand, when markets are performing poorly, investors tend to be extremely pessimistic and want to pull everything out of the market.  The actions of investors, as a result of the above described emotions, are what lead to investors significantly underperforming the market.  The truth is that when the market is really performing well investors should be pessimistic and when the market is performing poorly investors should be optimistic. 

Investors often try to pull everything out of the market when things are going poorly and then put everything back in when the market starts performing well again (or vice versa).  This is what leads to investors underperforming just simply leaving all their investments in the market.  The problem with trying to time the market is that an investor has to be right two times, when to get in and when to get out (or vice versa).

It's no secret that the market has been battered in the last few years.  This has led to many investors pulling all of their money out of the market.  There typically is a snowball effect because once investors start panicking, then other investors react the same way.  We call this the "Flight Response" because money starts pouring out of the market so fast that it often times compounds the losses in the markets.

Remember, that right now is the time to be optimistic in the market.  Stocks are on sale right now and you can buy more of them with less dollars than when the market is high.  However, we do not know when the market will turn around but, we are confident that it will at some point.  And when that happens, if you have been buying the stocks on sale, then you will have positioned yourself to experience much more of the rebound that those that chose to sit on the sidelines.

Ben Coakley