What active investors really do and what it costs them

A couple inherited $20,000 in 1985. The husband and his wife decided that they would put their windfall into mutual funds. They decided that they would split the money and each put $10,000 in their own account. They both selected the same stock mutual fund and put their money in on the first business day in January, 1986.

In the twenty years since that time, the husband stayed on top of the market, checking on how his investment was doing every month. His wife, meanwhile, was more concerned with raising their kids and would listen to her husband talk about how much he was making and occasionally, how much he had lost.

A year later the husband was very happy with his decision, his investment was now worth $12,000 and so was his wife’s.

After two years, at the end of 1987, the husband was very worried about all the news of the market crash in that happened in October. When he checked on his investment, it had fallen from $12,000 a year earlier to $9,600. He decided to limit any further loss and withdrew half of his investment and put $4,800 in his checking account. He wanted his wife to do the same thing with her $9,600, but she talked it over with her friend and decided against doing anything. Her friend, who was a financial advisor, assured her that the market would bounce back.

By the August of the next year, his wife’s account was back up to $12,000 but the husband still had $4,800 in his checking account, that did not increase when the market did. He regained his courage by the end of 1988 and put the money back into his mutual fund. By this time his wife’s account was worth $15,000 and his was only worth $12,300.

In the intervening years his wife simply let her nest egg grow but the husband moved money in and out of the market. He would read the stock market reports and talk with friends to find out what they were doing. When he became worried about losing his money he would withdraw some and when his confidence was restored he would invest it again.

By the end of 2005, the husband had built his initial $10,000 investment up to a whopping $21,422. His wife had not touched her investment so it suffered during times of market declines and recovered when the market did. By the end of 2005 her account was worth… $94,555.