Attempts to time the market by retail investors occur too frequently, despite repeated warnings by financial advisors to refrain from following the strategy.
Fears of a market correction often lead to investors selling stocks at their lows or waiting too long to get back into the market as their money sits on the sidelines in cash or other low-interest bearing assets.
Individual investors are often their own worst enemies and fall prey to buying high and selling low, said David Twibell, president of Englewood, Colo.-based Custom Portfolio Group. A recent industry study demonstrated that over the past two decades the average investor in U.S. equity mutual funds actually underperformed the funds themselves by over 40%.
"That's really startling when you think about it," he said. "The main reason was that the investors tended to buy funds when markets were peaking and sell them when the market was correcting - the exact opposite of what most investors are try to accomplish."
The advantage of utilizing financial advisors is that only they can they give retail investors "sound investment strategies, but often their greatest contribution is helping clients stick to their plan and make good decisions about their portfolio," Twibell said.
Investors who are fearful of a pullback in the market often overreact and sell all of their equities and follow the wrong herd.
"To paraphrase Warren Buffett, over the short term, markets tend to react more to shifts in investor psychology than fundamentals," he said. "If you can help your clients understand this and avoid following along with the herd during periods of extreme market euphoria and anxiety, you'll make a big difference in their financial lives."
The majority of investors need a financial advisor to help them avoid investing emotionally, which is common when large amount of volatility occurs in the market, said Ron McCoy a portfolio manager of the LOWS Fund with Covestor, the online investing company, and founder of Freedom Capital Advisors in Winter Garden, Fla.
"It is just human nature," he said. "You can try to train yourself and work through it and see why the stock is down, but with all the information available now it can just be white noise."
Financial advisors can also steer investors back to examining the fundamentals such as their most recent earnings report, price to earnings ratio, level of debt or dividend earnings and avoid the deluge of information available online.
"Investors should find someone they get along with, understands their risk tolerance and help them make sense of it all," McCoy said.
While financial advisors cannot predict when the market will make a correction, they can help investors avoid making some of the most common mistakes such as trying to pick a top and bottom of the market, he said.
These mistakes can lead to large losses, which can affect the investor emotionally and their future behavior.
"It is not as simple as getting out when they think the stock or a commodity such as gold has reached its high," he said. "Getting back in is the other half. It can be very tough to navigate the markets and most investors don't have it in them."
Advisors know they can not beat the system such as high frequency trading.
"The smart ones know they can not win by trading against the computers," McCoy said.
The proliferation of data online, TV shows, newsletters and the media can be overwhelming and in reality; not everything investors read or hear turns out to be accurate.
"You have to be able to sort the facts from all the opinions and people have a hard time doing that," he said. "When volatility kicks in, then they have no idea what they are doing or what they own or why they own it."
Even when the market appears overvalued, there are still strategies that advisors can recommend to generate higher returns such as buying or selling options.
"I am not always right, but as a financial advisor I can gauge the risk better, which is why it is helpful to have someone looking over your shoulder," McCoy said. "Having been through the ups and downs is invaluable and helps my clients. In a down market or when times get tough, that is where advisors really earn their keep and possibly help you refrain from making major mistakes."