Buy Low, Sell High: Right Time for the Former

Contrary to consumer behavior in retail, investors tend to shy away from the stock market when shares are cheap, but seem to be drawn to it like moths to a flame during market bubbles, when prices are highly inflated.<!----> In its June 2008 issue, The Wall Street Journal’s magazine “Smart Money” published a chart showing how investors are pulling money out of mutual funds during down markets. In other words, they are selling low.

Another example: Between 1973 and 2002, NASDAQ stocks gained an annual average of 9.6%. Yet, on average, investors only earned about 4.3% annually. One reason: $1.1 trillion were invested late in the game, between 1998 and 2000, when stock prices were highly inflated and the internet bubble burst soon after. And it is not just individual investors who fall victim to this behavior; Merrill Lynch’s professionals, for example, have b