They Sold Stocks, And Lived to Regret It

July 29, 2003 -- Every time Cynthia Altieri thinks about getting back into the stock market again, she recalls her experience with Amazon.com.

Altieri, a 39-year-old massage therapist who lives in Astoria, Ore., bought 10,000 shares of Amazon.com in July 2002, when the company's shares were trading at more than $16. After seeing the stock drop into the $12 range a few days later, Altieri got nervous and sold at $12.75, losing almost $40,000.

Now she regrets the decision, especially since Amazon.com's most recent closing price was around $42. If Altieri had hung on to the stock, she would be about $260,000 richer today.

The experience has scarred Altieri, and likely many other investors who sold shares while the markets were tanking but are now learning a hard lesson about the buy-and-hold philosophy as markets regain some of their shine. Stocks ended one of their best quarters at the end of June, when the Standard & Poor's 500 index posted its biggest quarterly gain in 4 ½ years.

Altieri, who has been investing in the stock market since 1995, tried buying some stocks in early March when the market started going up again, but got nervous and pulled out a few days later, making only $700 for her efforts.

"I'm not healing as fast as everyone else seems to be," says Altieri. "Sometimes I feel like it's only me not making money."

"I think people are always regretful," says Joe Murtagh, a certified financial planner based in Goshen, N.Y. "They run on fear and then they retreat and they say, 'I wish, if only I had.' "

Funds Flowing Into Stocks

While some market watchers are reluctant to declare the bull has returned, many investors have been eager to jump back on the investing bandwagon.

Domestic equity mutual funds have seen 19 straight weeks of inflows, with an average of $2.13 billion of new money invested a month in domestic stock funds this year, according to the latest figures from Banc of America Securities. The investment bank said domestic stock funds saw net inflows of almost $1.7 billion for the week ended July 25.

By contrast, from the second quarter of 2002 until the first quarter of 2003, domestic stock funds lost $90 billion from investors pulling out their money, according to the investment bank.

The Investment Company Institute, the Washington-based mutual fund industry trade group, is also reporting inflows into stock mutual funds, with almost $3 trillion going into domestic equity funds in May, up almost 7 percent from April.

Banc of America Securities' research says the stock market is still a long way from "irrational exuberance," the phrase made famous by Federal Reserve Chairman Alan Greenspan when describing investors' unquenchable thirst for stocks in the late '90s.

But there are other signs that individual investors are willing to take a chance on the market again.

Ameritrade, the Omaha, Neb.-based online brokerage, reports it saw an average of 154,294 trades a day during the quarter ended June 27, up 33 percent from an average of 116,246 trades a day for the quarter ended March 28.

"People are seeing opportunity again," says Donna Kush, Ameritrade's director of corporate communications. "They're getting good economic indicators and they're very interested in getting back into the market."

Sitting on Cash, Missing on Gains

The market's recent comeback has been little consolation for people who sold out of the market during the prolonged slide that began in the spring of 2000 and have sat on the sidelines ever since.

Shashin Shah, a certified financial planner based in Dallas, said he's had a few clients who sold out of stocks and went to cash last fall, and are now starting to trickle back into the market.

"By sitting in cash, they've essentially lost out on a 20 percent hike," says Shah, who says some of those clients felt justified about their decision to sit out the markets during the Iraq war.

"Little did they know how short the war would be," he says.

Some recent research underscores how much investors can make by being in the markets at the very beginning of a turnaround.

The Schwab Center for Investment Research analyzed bear markets and subsequent market performance from January 1926 to October 2002. Researchers found that stocks historically produced higher average annualized returns in the 12 months immediately following a bear market than in subsequent months.

So an investor who had stayed in the markets would have realized a 47 percent average annualized return in the 12 months immediately following a bear market. Investors who waited one month after the end of the bear market to invest saw their returns drop to 33 percent. Those who waited six months after the bear market to invest saw only an 11 percent gain, according to the center.

"Investors would be better off if they could stay a steadier course — not go too wild in the best of times and not pull out and hide completely in bad times," says Terrance Odean, associate professor at the Haas School of Business at the University of California, Berkeley.

Optimism Reigns

Still, Odean, who has done extensive research on individual investors' behavior, isn't surprised by many people's decision to sell during the market downturn. One of the studies he co-authored found individual investors tend to buy stocks on "high attention" days; or days when the stocks are in the news or have high trading volume or extreme price moves.

"You find the money flows into the mutual funds with good performance the previous year," says Odean. "You can extrapolate the same thing to the market. People tend to put money into the market when it's doing well. When it's doing poorly they don't."

Indeed, other investors who've been burned are nevertheless jumping back into the market to try to capture some gains.

Jason Rubin, a 32-year old forensic accountant who lives in Los Angeles, is one investor who has sat through the ups and downs alike. Rubin bought shares in software company Citrix Systems in late 2001 at $24 a share. He later sold the stock in the middle of 2002 after it steadily declined to $6 a share, losing almost $10,000. The stock's most recent close is back to almost $20 a share.

"It was stupid, like buying at the top and selling at the bottom," he says now.

But he's had success too — like the purchase of Audio Codes shares, a company that makes voice and data transmission products. Rubin first bought 1,050 of the company's stock for around $7.30 a share in July of 2001. Even though the share price dropped to about $1.70 the following July, instead of selling, Rubin bought 3,700 more shares. A year later, the company's stock price is up to around $5.35, making Rubin over $13,000 on the shares he bought for $1.70.

"It's all been made the last three months," he says.

"I'm kind of sad about the stocks I had sold, but in March I bought a lot of mutual funds and I've done very very well," he adds. "I've pretty made up all of my losses."