Markets have taken four years to reach records: Where have you been?
Are you getting the urge? Got the itch? To invest heavily in stocks, I mean. And particularly U.S. stocks. You may have heard that the Dow Jones Industrial Average is reaching all-time record highs. So is the S&P 500 Composite Index. If you’re a self-directed investor, you know all about it. Both of these U.S. indexes are probably the most closely followed of all stock market indexes in the world. And with headline-stealing super investor Warren Buffett saying recently that he “feels sorry for people that have clung to fixed-dollar investments,” the temptation to sell all the bonds in your portfolio and flip over to stocks must seem overwhelming. If the money bandwagon is rolling, shouldn’t you be on it?
Is now really the time?
It’s true that every time a major move happens on the stock market, or a respected investment guru like Warren Buffett puts in his two cents’ worth, the business media sits up and takes notice. And smaller investors always take note. More money flows into equity mutual funds, for example. That’s generally a reliable indicator of renewed interest in stocks by smaller investors.
The paradox here is that since its low back in March 2009, at the depths of the global financial crisis, the Dow Jones Industrial Average has advanced about 125%, crossing the record 15,000 mark recently – and staying there. But make note of this: That record has been a full four years in the making! Even Toronto’s resource-heavy S&P/TSX Composite is up 64% in the same period. The pros – the pension funds, hedge funds, the “smart” money – have been in stocks since the lows of 2009. Where have all the small investors been? In fact, if you’ve been sitting on the sidelines, hugging tightly to your bonds, you’ve in effect missed another cyclical post-recession bull market in equities.
Ask the right question
The right question to answer here is not whether now is the right time to put money into stocks; rather, it is, “If you haven’t had exposure to the stock market over the past four years, why not?”
When clients ask me whether now is the right time to get into the stock market, I usually tell them thatanytime is the right time to get into stocks. In fact, you should always be in stocks. If you’re not, you’re doing something wrong. This usually gets some raised eyebrows and quizzical looks. Then I go on to say that you should also always be in bonds. And in cash. In other words, you should have a plan.
I’m talking here about proper asset allocation, one of the keys to success in personal money management. Basically, this means that you determine what kind of investor you are, what your financial objectives are, how much risk you can really withstand, and then create a portfolio of investments that reflects that profile.
You might, for example, be a growth investor – a little more aggressive in your outlook – and allocate, say, 10% of your portfolio to cash, 25% to fixed income, and 65% to stocks. And you’ll stick to roughly this allocation through thick and thin. You’ll always have a largeish portion of your holdings in equities, but you’ll also have bonds to help mitigate risk and provide income, while your cash gives you flexibility. Over the past four years, you’d have done pretty well with this kind of portfolio. And you wouldn’t now be wondering whether it’s time to “get into stocks.” You’ll already have been in stocks, reaping the gains along the way.
And what if markets head south?
There can be no doubt about it. There will be a correction – that’s when the market falls 10% or more from its recent high before recovering again. But this is important: No one knows exactly when that will happen or by how much. Trying to guess market tops and bottoms is called “market timing” and no one ever gets it right, except by sheer accident.
When you have a planned asset allocation strategy that you stick to, you’ll feel more comfortable weathering the inevitable stock market downturns. Yes, the equity portion of your portfolio will plunge right along with the market. But your bond holdings are likely to soar, offsetting losses in equities. That’s called mitigating risk.
And that’s why I tell clients they should be in stocks, bonds, and cash at all times, instead of switching in and out of assets at random based on the headline of the day. It’s a matter of degree – allocating your asset mix according to your objectives and tolerance for risk. The market hits a record high? It plunges 10%? So what? Investing is a long-term business, and you’ll have a much greater chance of success in the long term if you have a plan…and stick to it.