Sell low, buy high: Are investors being stupid again?
Everybody knows it's unwise to start buying stocks after the market rises sharply, says Carl Richards in The New York Times. So why do we keep doing it?
It's the oldest advice in the markets: Buy low, sell high, says Carl Richards in The New York Times. But investors always seem to get it backwards, and "we're doing it again" right now. Mutual fund investors, spooked by the sour economy, pulled money out of the markets in 2008, 2009, and 2010. "Then, in January, someone hit a switch," and people started buying again. The trouble is, by that time the market had already posted "big gains," sharply limiting the money these people stood to make. It's unwise, says Richards, but understandable. Here, an excerpt:
Unfortunately, we’re hardwired to want to move away from things that cause us pain and move closer to things that give us pleasure or a sense of security. From that perspective, wanting to sell when everyone around us is panicked and fearful and buy when everyone starts feeling better and things have cleared up makes perfect sense....
Another reason we may jump back into the market is that we can’t take the pain of watching it rise day after day. Maybe in early 2009, you decided that you were done with the stock market forever. Then as the days went by and sustained positive returns emerged, you started feeling like you were missing out. Your friends were talking about investing it again. It was killing you. "O.K.," you said to yourself, "maybe it’s about time to get back in."