Tuesday, March 07, 2006

A Case of Bad Timing

Jim over at Blueprint for Financial Prosperity has a post has a post entitled "You Have Terrible (Mutual Fund) Timing" about mutual fund investors and their bad market timing. Boy does this one really hit home...I feel as though I have awful market timing.

The article states that "Andrea Frazzini of the University of Chicago and Owen A. Lamont of Yale conducted a study that showed that mutual fund investors tend to enter a fund as it’s about to sag and dump it before it enters a “several-year” period of above-average performance." Jim sums it all up very nicely. He writes "My interpretation is that investors chase past performance (ignoring that little disclaimer on each fund) and it hurts them. This does make sense, imagine if a mutual fund has performed well and suddenly sees a huge inflow of money. It’s easier (and cheaper per share) to purchase 10,000 shares of a company than it is 100,000. To replicate those returns with more money is probably considerably harder. Moral of the story? Just buy an index fund!"

I experience this timing problem with regualr stocks too. I just do not know when to sell them. I have written about this before in my Take the Profits and Run post and I think that I did fine with that stock. However, I have another stock, Trend Micro (TMIC) that I have held for a few years now. I bought it at $32.00 and at one point it was up around $53.00...did I sell? Nope, I thought that I was in it for the long haul and should just buy and hold it. Well, now it is down to $30, so I guess I messed up there. Then I have a couple of stocks that I bought and they ran up about 20% in a month or so and I never know what to do with them. Do I take the quick profits and the hit with taxes for short-term capital gains (I was actually told by someone that they thought that all gains through 2008 would be taxed at the long-term rate...can anyone confirm this) or hold on longer? Part of the reason that this is tough is because we aren't talking about $10,000 in each position here...it is small amount, usually around $1,500, so 20% isn't thousands of dollars (I know...20% is 20%).

One reason that this is difficult for people is because of our emotions. It is very hard for someone to want to buy something when it is down. However, this is something that people need to get past, because it can really hurt you. You don't want to jump into a stock or mutual fund just because it is going up...that means you are probably buying high. You also don't want to get out of your position just because it is going down. That might signal a good opportunity to buy more if you still believe that it is a good company.


Blogger DD said...

I always sell according to a plan. If it's a short term investment like company stock, I sell whenever I think it's a decent price. I may have missed the absolute peaks but I'm happy with the return I get and who cares if someone out timed me.

3/09/2006 11:56 AM  
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