This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Investors Behaving Badly: Don't Panic-Sell

The average shareholder probably won't outdo the S&P 500 this year, according to Louis Harvey, president of Dalbar, a Boston research firm.

The problem is that millions of investors are dumping funds. Struggling to pay their mortgages, hard-pressed homeowners are taking money out of their IRAs. Panicked shareholders are selling stock funds and buying Treasuries.

The timing of these moves couldn't be worse, says Harvey. When investors sell into a downturn, they lock in losses and miss out on the eventual rallies.

"When the market is going down, you should be buying," he says.

Harvey should know. For two decades, he has been tracking the behavior of fund investors. All too often people buy when the market is peaking and sell near the bottom.

One of the most dramatic examples of mistiming occurred in the 1990s when Janus Twenty (JAVLX) rose and fell. In 1997, the fund had $6 billion in assets and an annual return of 29.7%. Seeing the giant results, investors poured into the fund, which reached $36 billion in assets by 1999. But the newcomers had arrived just in time for the collapse that came in 2000, when the fund lost 32.4%.

The bad behavior explains why many fund investors get miserable results, Harvey says. During the 20 years ending in 2007, the average equity fund shareholder had an annual return of 4.5%, more than seven percentage points behind the S&P 500.

The outlook for fund investors is not all bleak. In recent years, a growing percentage of assets has been coming into funds through 401(k) plans and other retirement accounts. Most 401(k) investors dollar-cost average, putting in set amounts each month. As a result, the plan participants buy shares on dips, a process that boosts long-term returns, says Harvey. The flood of cash into retirement plans helps explain why the average equity investor returned 7.1% in 2007, nearly 2 percentage points better than the S&P.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,493.46 -185.24 -1.05%
S&P 500 2,037.77 -19.32 -0.94%
NASDAQ 4,709.6940 -62.0690 -1.30%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs