Stock market fears have cost investors $200 billion in gains over the past four years, Bloomberg reported Monday.
From the story "Americans miss $200 billion abandoning stocks":
Assets in equity mutual, exchange-traded and closed-end funds increased about 85 percent to $5.6 trillion since the bull market began in March 2009, trailing the Standard & Poor's 500 Index's 94 percent advance, according to data compiled by Bloomberg and Morningstar Inc. The proportion of retirement funds in stocks fell about 0.5 percentage point, compared with an average rise of 8.2 percentage points in rallies since 1990.
Though the stock market has climbed to near pre-crisis levels, it's been a perilous ascent for investors. Spikes of volatility through the years have kept investors on edge and uncomfortable. On March 9, 2009, the S&P 500 index hit a bottom. It's been on an upward trajectory ever since, but there have been some bumps along the way: between April and July 2010, the index pulled back about 16 percent; in July 2011, it lost about 18 percent through the beginning of October; and 2012 saw a drop of about 9 percent between the beginning of May and June.
The roller coaster has investors paring back on stocks. Though that could cost them in the long run, it may be a smart move to listen to their instincts during times of unpredictability, according to Matthew Tuttle, certified financial planner, CEO of Tuttle Wealth Management in White Plains, N.Y., and author of "How Harvard and Yale Beat the Market."
"Individual investors are right to fear the market. They also tend to invest and get out at exactly the wrong times. Until they can get beyond the traditional buy and hold advice, this will keep happening. The key to safety is being in harmony with market trends," Tuttle says. "Buy and hold would tell an investor that they should invest the same in 1995-1999 as they would in 2008. That makes no sense. Investors need to be invested when the market is in an uptrend -- 1995-1999, 2003, 2009 -- in cash or Treasuries or gold when it is in a downtrend, as in 2000 to 2002 and 2008. And they should play it close to the vest in years like this where risk is high and it could go either way. This is, of course, not easy for an individual to do because their emotions will betray them, but there are a bunch of tactical mutual funds and money managers out there."
The trick is knowing when to act
Though investors can take clues from economic indicators, timing the market is no easy feat. Most people get out of the market after they've lost money and reinvest after most of the gains have been made. A well-known study looked at the impact on overall returns from missing the 10 best days in the stock market. The same study also looked at what happens if you missed the 10 worst days over the past 84 years.
This chart from mutual fund and investing company, Invesco, shows how important limiting losses and maximizing returns is.
The market's worst days and effect on returns
Growth of $1 in the S&P 500 Index from Dec. 31, 1927, to Dec. 31, 2011
|Days||Growth of $1||Cumulative return (%)|
|Capture 10 best and worst||71.21||7,021.18|
|Miss 10 best||23.62||2,262.10|
|Miss 10 worst||226.14||22,514.32|
|Miss 10 best and worst||75.01||7,401.19|
Avoiding big losses is key, but generating decent returns is also extremely important. That's why most investors must balance safety with some risk rather than abandoning stocks entirely during times of perceived volatility and going all-in when it's perceived as safe. If anyone could tell the future with any reliability, the majority would probably give up on investing altogether and simply invest in lottery tickets.
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