Why you continue to lose money in your 401k while I make money

“You can’t time the market over the long term, it’s not possible. You’re just lucky, you’re luck will run out sooner or later. Just buy and hold, that’s the only way to make money in the stock market.” I’ve heard it all, and I’ll tell you what, those people that think that way are making me tons of money. I’ll let them think that way as long as they want, eventually, they will come around to my same conclusions, and then maybe I will exit the markets. Until then, I’ll continue to buy when people are selling off like mad men, and sell when they are on a buying frenzy. Over the past 10 years, most individual investors in 401ks and mutual funds haven’t made much money at all, in fact, many have lost alot.

An interesting article shows some fascinating facts that support my view:

A remarkable new study from TrimTabs Investment Research shows that regular investors needlessly lost billions more than they should have on the stock market. Why? It’s the old story: They invested more money in their equity mutual funds during the booms . . . and then sold them during the panics.

So even though Wall Street overall ended the decade pretty much level (when you include dividends), average investors lost a bundle.

TrimTabs puts the losses at $39 billion. It calculates that mutual fund investors bought into the Standard & Poor’s 500 Index ($INX) at an average of 1,434. That’s close to its record high of 1,565. If investors had invested at random times instead, the average would have been 1,171.

“It cost them about 20% to buy high and sell low,” says TrimTabs’ Vincent Deluard.

So even though the stock market today is around its 10-year average, TrimTabs reckons most of those who invested during the decade are actually sitting on hefty losses.

What does this dismal news mean for you, the investor, now?

Oddly enough, it means almost exactly the opposite of what Wall Street is going to tell you it means. The Wall Street crowd will say, as usual: “See, you can’t time the market! Just like we told you! So just give us all your money, and just go with the flow.”

That this line happens to serve the economic interests of Wall Street is, of course, a pure coincidence. Yet the TrimTabs numbers show, instead, that over the past decade it was actually quite easy to time the market. All you had to do was buy when the public was selling and sell when the public was buying.

Naturally, going against the crowd is easier said than done. That’s why the best professional investors like to say that successful investing is “simple, but it isn’t easy.”

Human beings are hard-wired to run with the herd. For millions of years, when the herd stampeded, the smartest move wasn’t to hang around and wait to see why. It was to run.

And that’s how investors act on the stock market as well. But when it comes to investing, it’s a bad idea. Feelings are a bad guide. And there is no safety in numbers.

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