Buyers/Sellers Remorse
I know long-term interest rates are going to increase. Heck, I knew this six months ago. It was going to happen — and happen soon. I would have put money on it (but luckily I didn’t).
I’m continually amazed by pundits and my ability to see the future so clearly, only to forget our predictions so easily. And those of us that do remember have ready excuses due to “unforeseen events.”
Each time I find a sure thing, I give myself a few days to think it over. Usually, I start finding problems with my idea. Most of us would be better off if we did this more often — much like shop-a-holics should put something on hold instead of making an immediate purchase. Buyers and sellers remorse is a big part of investing — and can cost you much more than a trip to the mall.
However, many people still try to time the market — moving money in and out of the market to try to get better returns. Of course, these timers inevitably end up hurting themselves in the end.
Money calculated the return investors actually earned investing in 700 mutual funds from 1998-2001 and compared that value to the returns of the funds over the same time period. The shareholders annual return was 1%, compared to 6% for the funds.
The difference is that shareholders were buying and selling at exactly the wrong moments. When the fund performed well, the investors gained confidence, and cash flowed in to the fund. When the fund performed poorly, the investors lost confidence, and cash flowed out. The investors were buying at the top and selling at the bottom.
The investors would have been much better off to buy and hold rather than to let their emotions control their investment strategy.
Before you decide to buy or sell, make sure you have good reasons and that your emotions aren’t guiding your decision. Don’t think that you can predict the future or get upset with yourself for your lack of foresight. (For example, it was obvious to me that the market was overvalued in the late 90s, and I should have cashed in, but if I would have given myself the leeway to bet against the NASDAQ, I would have been broke way before the bubble eventually popped.)
Maybe interest rates will stay flat for a while, maybe they won’t. But I’m smart enough to know that I don’t know what will happen; and smart enough that my investment strategy doesn’t totally depend on my forecast of the future.
