Dalbar’s Harvey: Individual Investors Brilliant at Mistiming Markets

Monday, 11 Mar 2013 08:13 AM

By Dan Weil

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Retail investors’ renewed enthusiasm for stocks now that they’re at record highs is something to fear rather than celebrate, says Louis Harvey, president of Dalbar, a research firm in Boston.

“This is one of those moments,” he tells The New York Times. “It’s one of those times we warn about year after year.”

A Dalbar study of the last 20 years shows that investors in U.S. stock mutual funds earned an average annualized return of 4.25 percent during that period, while the Standard & Poor’s 500 stock index generated an 8.21 percent return.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

So what gives? Part of it is that most mutual funds, after fees and expenses, don’t beat market indices.

But part of it is also that investors “move their money in and out of the market at the wrong times,” Harvey says. “They get excited or they panic, and they hurt themselves.”

Individual investors are brilliant at buying high and selling low, just the opposite of successful investment strategy.

So if you must jump into stocks now, “make sure that you select a reasonably defensive asset allocation strategy first,” Harvey notes.

“The most important thing, once you have a strategy is to find a way to actually stick with it,” he adds.

One person who thinks it’s definitely a bad time to purchase equities is Marc Faber, publisher of the Gloom, Boom & Doom Report.

He predicts stocks will either endure a 20 percent correction this year before making a definitive move higher, or they will suffer through a 1987-style crash, when the market rose early in the year then dropped more than 20 percent in a single day in October, he tells CNBC.

Stocks already have soared more than 100 percent from their March 2009 lows, Faber notes. “I think investors who today are rushing to stocks need to be reminded” of the market bottom exactly four years ago.

“It will end badly this year.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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