A Get Rich Slowly reader shared his financial advisor’s advice when asked whether he should go with mutual funds or index funds:
“..in 2008, as banks stocks were dropping rapidly, if they were a part of an index like the S & P 500, they were still held by the fund, while a manager of a fund could lower the funds exposure to this sector, thus attempting to limit the downside risk to the portfolio.”
This, of course, is a classic case of trying to time the market … and, we know what happens when anybody (except for Warren Buffett and a select few others who aren’t giving you their advice) try and time the market …
… for example, the famous Dalbar Study shows that people who attempt this reduce their returns from 11.9% to only 3.9%.
In their latest report, Dalbar says:
The unprecedented ups and downs of 2011 drove up the aversion to risk and investors succumbed to their fears. They decided to take their losses instead of risking further declines. Unfortunately, as is so often the case, this occurred just before the markets started on a steady trek to recovery.
So, the idea of ‘taking bank stocks’ out of your portfolio just as they are crashing is very enticing, but simply means that you also need to work out how to put them back in when they are climbing …
… and, if you really could pick when stocks are climbing or falling, you’d be off living the high-life in Monaco.
You certainly wouldn’t be selling your advice to us ordinary folk, now, would you? 😉