What Makes Investors Buy High, Sell Low?
American Century Investments
June 21, 2012
Conventional investment wisdom says: Buy when the price is low, wait for the investment to increase in value, and sell it at the top to realize gains. It seems like a straightforward strategy. So why don’t investors follow it?
When the dangers of market volatility appear, investors tend to react emotionally and not stick with a long-term plan. It’s understandable, because it can be difficult to see the potential in a stock that’s doing poorly (but priced attractively) or the possible risk in buying a stellar performer that could be at or near its peak (overvalued).
The proof is in purchase trends. Equity mutual fund purchases have loosely followed the broad market’s ups and downs, contrary to the preferred buy low, sell high approach. As the chart illustrates, many investors are buying when the stock market (as represented here by the S&P 500® Index) is going up, and selling when the market falters.
One of the largest flows into equity mutual funds occurred in early 2000 during a market peak, and one of the largest outflows occurred in the third quarter of 2002, coinciding with a market drop.
More recently, investors scaled back equity fund purchases in late 2008 just before the market dipped to another low point in March 2009. The problem with these actions is that investors realize their losses when they sell and miss opportunities for growth when the market rebounds.
What’s the solution? It’s hard not to be emotional when your lifestyle and plans for the future depend on the money you’ve invested. But a long-term investment strategy and a broadly diversified portfolio customized to your individual situation can help you weather market fluctuations and have the confidence to stick to your plan.
Sources: Standard & Poor’s, Morningstar Data as of 5/31/2012 Flows in
Index is a capitalization-weighted index of 500 widely traded stocks. Created by Standard & Poor’s, it is considered to represent the performance of the stock market in general. It is not an investment product available for purchase.
Diversification does not assure a profit nor does it protect against loss of principal.
Equity mutual fund flows include both domestic equity and international equity.
Net flows are for illustrative purposes only and are not indicative of the performance of any particular investment.
This information is for illustrative purposes only The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
(c) American Century Investments
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