Don't follow the herd

"Human beings are hard-wired to run with the herd," Brett Arends writes in The Wall Street Journal. "For millions of years, when the herd stampeded, the smartest move wasn't the hang around and wait to see why. It was to run."

Over the past decade, however, if you had not followed the herd in the stock market, you would have done well. Arends cites some research from TrimTabs Investment Research showing that regular investors needlessly lost billions more than they should have on the stock market.

TrimTabs puts the losses at $39 billion. It calculates that mutual fund investors bought into the Standard & Poor's 500-stock index at an average of 1,434. That's close to its record high of 1,565. If investors had invested at random times instead, their average purchase price would have been 1,171. 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.

It's just that simple.

Even during a flat decade, people could make money just by going against the herd. They didn't need to know anything else. They didn't need quantitative models, astrophysics Ph.D.s from M.I.T., inside information or privileged access. All that money spent on equity research? All you had to do was look at the latest numbers from the Investment Company Institute, showing whether the public was putting money into their stock-market funds or taking it out. And then do the opposite.

The way to do this automatically is through dollar cost average. That means you put a certain amount of dollars into the market regularly. When the market is down, your dollars buy more shares. When the market is up, you buy fewer. Automatically.

You first pick an asset allocation that works for you -- say, 60 percent stocks, 30 percent bonds, 10 percent cash. Then find a mutual fund that maintains this allocation -- look for one with low expenses, typically an index fund. Then have the mutual fund company automatically withdraw whatever amount of dollars you can afford each month.

Now you are buying low and selling high, while the herd is going over the cliff.