February 2018 started with a poor market performance. The S&P 500, Nikkei 225, STI and Shanghai Stock Exchange Composite index is down by -5.82%, -7.03%, -4.79% and -7.94% respectively in SG dollars. In terms of technical analysis, the S&P 500 plunged and is almost reach to its support level (chart is as at 9 February 2018):
Guess what? Most investors panic and sold their shares. Actually, it is well known that majority of investors buy high and sell low. Frankly speaking, have you really come across anyone who buy low and sells high? I personally have never come across such a person. Even if there is, it is likely that person isn't telling the truth.
The following are some evidence to show that investors always buy high and sell low. The bar chart shows the net equity cash flow (in USD) into mutual funds. On the other hand, the line chart is the year-on-year returns of MSCI AC World USD. The pattern shows that when the stock market was rising, many investors would buy equity funds. But when market becomes bad and turn negative, investors start selling their equity funds. (Click on image for source).
Click image for source
The following is a chart for bond investment. When the bond market was rising, many bond investors buy bond funds. But when the bond market drops, bond investors sell. The bond index used is the FTSE US Broad Investment Grade Bond Index. Click on the image for the source.
Click image for source
These data are from US. But it should be relevant to Singapore as well because, as far as I know, all are human beings.
By the way, for those who just want to read about what's happening in the market, here are some articles:
- Insights – Late cycle investing – Navigating negative rates 3/10/2019
- Look Beyond the FAANGs 10/9/2019
- Hong Kong Stocks Still Developed World’s Cheapest After Rally 6/9/2019
- Navigator Newsletter Aug 2019 2/9/2019
- HKD peg how different 10/6/2019
- What Don’t We Know About China’s Demographic Pains? 22/5/2019
- Myths And Realities Behind The Sino-Us Tech Competition 2/4/2019
- Doves fly above hawks: Investment implications 21/3/2019
- China markets: A sneeze is not a cold 11/3/2019
- Challenges in assessing political risks 7/3/2019
Update 23 April 2014: S&P 500 have surged by a huge percentage. You know what? Many investors now want to invest! See this article: Advisors aim to rein in risk-hungry clients
Update 24 June 2014: Here is another article which basically found the same thing that investors buy high and sell low: Are You Managing Volatility, or is it Managing You?
Update 6 Jan 2016: This article was originally written on 23 July 2013. I have updated the article with the latest charts and figures.
Update 14 Sep 2016: Update the first two charts to current.
Update 10 Feb 2018: S&P 500 crashed -5.82% in SGD in February itself. Investors panic. Updated the two flow charts. Add chart on S&P 500 at support level. An investor lost 100% of his $4 million investment portfolio in one day: https://www.marketwatch.com/story/xiv-trader-ive-lost-4-million-3-years-of-work-and-other-peoples-money-2018-02-06
Update 26 Sept 2019: Updated the two flow charts
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The old saying that 95% of investors lose money except the other 5%.
Well, now I’m starting to get interested in stocks. Not saying to buy anything now. But it’s always good to start monitoring & studying when the market is at multi-year lows and fallen by at least 20% off its highs. If you simply put in money into blue-chip strong-dividend-paying stocks only when markets drop over 20%, and forget about the market, you’ll do much better over 10, 20 years than most so-called professional fund managers.