With the S&P; 500 index at a level that is roughly double the market’s low point on March of 2009 we have seen massive inflows of money into stock mutual funds and ETFs. Investors who fled the markets in late 2008 and early 2009 at the low point seem to be getting back into the market. It feels good to buy stocks.
Jason Zweig recently wrote an excellent piece on this phenomenon in the Wall Street Journal. In his article Zweig quotes Michal Strahilevitz, a business professor at Golden Gate University in San Francisco who studies how investors behave.
“First in 2008 and 2009, they suffered until they said ‘I can’t take it anymore’ and sold all their stocks,” she says. “And now they’ve had to deal with the trauma of watching the market go up and realizing that they’d be better off if only they hadn’t gotten out.”
That can lead these investors to plunge impulsively back into the very market that burned them so badly. “They’re willing to risk more in the hope of not being losers again,” Prof. Strahilevitz says. “It’s ‘Damn the rationality, I just want to feel good.’”
As a financial advisor I’ve seen this for years. In the late 90s a fund in a 401(k) plan that I advised had great year returning almost 80%. The following year saw increased contributions and transfers into this fund just in time for the dot com bubble to burst. This small cap fund was hit hard.
Readers of this blog and those of you who follow me on social media know that I believe in investing based upon your financial plan which should be based on your financial goals and tolerance for risk. This is not to say that you shouldn’t be investing in equities now or that you should be selling your current equity positions. Rather you should be investing based upon your financial plan, not based upon what you see on CNBC and elsewhere in the media.
Investing isn’t hip or trendy; rather it is generally a means to an end. Often that end is the funding of your financial goals, for example retirement or a college education for your children. If you need help with investing or financial planning questions please feel free to contact me.
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So true, we need to switch that noise off and stick with the plan. These past few years has just solidified investing lessons that I should have already followed.
Dave thanks for the comment. This feels like a movie that we've already seen. I'm not sure why folks think the ending will be different this time.
For the future everyone needs to plan and find ways to save money, but being single presents a few unique prospects and issues to consider.
Thank you for visiting the site and for your comment.
It’s amazing to watch people make the same mistake over and over. This is the reason people need to be value investors. You must train yourself to buy value and sell “greed” assets. It’s risk management that works if you are mentally prepared and do your homework!
Thanks for the comment Ken. I couldn’t agree more.