Do stock market fluctuations cause bad decisions?

Do stock market fluctuations cause bad decisions?

June 26, 2015

Do stock market declines get you down? Do you overreact to advances?

Join the crowd.

The illustration below summarizes the tendencies of many investors. When stocks are high they become enthusiastic and buy. They lose enthusiasm when stocks decline and sell.

Buying high and selling low is not a good strategy. As a result, the average mutual fund investor experiences a lower rate of return than the rate of return for the mutual funds in which they invest.

Stock market declines are normal. The table below illustrates the average frequency of 10% and 20% declines in the Dow Jones Industrial Average. Note that the market is overdue for both a 10% and a 20% decline.

Historically, investors did not need to buy and sell at the right time to profit from investing in a diversified portfolio of quality stocks. They only needed to buy and hold for a long enough period of time. Of course, past performance is no guarantee of future performance.

If you think you are making an investment decision based on emotions, perhaps you should call an investment manager.

This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.

Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.

Keep in mind that:

  • Past performance is no guarantee of future performance
  • Investments involve the risk of loss of principal and earnings
  • ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
  • “Average annual return” evens out variations in the actual year-to-year returns.
  • ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
  • None of the information provided by Arthur Stein is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and they should not assume that these generalizations or information applies to them.
  • Investments mentioned may not be suitable for all investors.

Arthur Stein Financial, LLC is registered with the states of MD, DC and VA. It is not registered with, nor is it required to be registered with, the Securities and Exchange Commission.