Overstay

Overstay refers to the act of holding an investment for too long. It often occurs when traders attempt to time the market by identifying the end of a price trend and the beginning of a new one, but, due to greed, fear or overconfidence, tend to overstay their positions. This usually results in reduced gains or, worse, further losses.

Overstay, in technical analysis, is to hold an investment for too long so that it cuts gain or causes a loss. An investor may predict the end of an uptrend in a security's price but believe the coming downtrend is only temporary. However, the downtrend may continue, and the investor may refuse to sell, overstaying the investment so that losses accumulate.

Overstay is a severe risk to investors attempting to time the market. Knowing when to sell or get out of an investment is just as important as knowing when to get in. However, timing the market correctly is a task that even professional investors and traders find challenging to accomplish on a consistent basis, so attempting market timing is not recommended for the average investor. Overstay is not an issue for buy-and-hold investors.

Market timing is the act of moving in and out of the market or switching between asset classes based on assumptions made using predictive methods such as technical indicators, economic data or gut feeling. Because it is challenging to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested. Overstay is a particular concern for investors attempting to time the market.

In 2010, Morningstar research found that the average investor underperformed the very mutual funds they were invested in, sometimes by more than 5 percentage points. This data seems to support the idea that most investors (despite what they may say) allow a buy-high, sell-low strategy. The general tendency of investors is to buy after a stock or mutual fund price has increased, missing out on the gains, while selling after the decline, locking in losses. This behavior is sometimes referred to as “chasing returns.”

Most investors, unfortunately, have poor timing, becoming less risk-averse when markets are rising and more risk-averse when markets are falling, a strategy that will actually result in less wealth in the long term compared with someone who consistently invests over a long period regardless of market trends.