One Way to Destroy Your Retirement Plans: Buy High and Sell Low

Investors usually flee stock funds at the end of stock market declines, just in time to lose out on the next round of gains.

As the stock market has fallen, investors have pulled money out of stock funds. This is true of the Federal government’s C fund as well as other mutual funds.

Here’s a dramatic example. For the month of July, investors pulled $50 billion dollars more from stock funds than they deposited. This withdrawal rate set a record for the dollar amount of withdrawals during a single month according to the Wall Street Journal.

As you may know, the recent stock market drop hit its low toward the end of July and it has been going up ever since. Or, stated differently, investors who pulled out money from stock funds during July sold their money at or near one of the lowest points of the stock market decline. They bought high and sold low.

Ironically, this usually happens. It will happen again. It is human nature.

Historically, investors usually sell more stock toward the end of a bear market just as it reaches its low point. Obviously they don’t do this intentionally; people just get tired of watching their investments dwindle and when the pain becomes too great, they sell. Stock market watchers refer to this as “capitulation” meaning that most investors can’t take any more pain they feel when watching their stock value drop. The more successful investors, or perhaps the most courageous, are usually buying at this low point.

Of course, it isn’t possible to know when the low point of the market has been reached. At best, it is an educated guess or a balancing of risk to reward. When stocks have fallen dramatically, it is usually a good time to buy more because the probability of the value dropping much further is reduced. That is easy to say and very hard to do when it comes to investing your own money.

Keep this in mind when looking at your TSP funds. People who try to predict the short-term direction of the market often are wrong. It can’t be done with consistency.

Investors without a plan will surely include their funds among the $50 million withdrawn from stock funds last month. They maximized their losses. More successful investors have a plan, such as putting money to work each pay period, and sticking with this plan. In this way, you invest money as the stock market dips as well as when it goes up.

Investors without a plan will include their funds among the $50 million withdrawn from stock funds last month. They maximized their losses.

It’s your retirement and your money. Learn how to invest wisely or plan on working as long as you are able because you will not have any other choice.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47