One of the most enduring notions people have about stocks these days seems to be that the market can’t be trusted.
Partly, the media is to blame. Along with the standard recession stories, there is a natural compulsion to focus on the human tragedies, not least of which are stories of investors who were heavy on stocks right into the credit crisis.
The trouble, of course, is that these narrow, slice-of-life tales don’t capture obvious facts: The stock market has staged a massive comeback in the five years since the 2008-2009 dive. All told, the Dow Jones Industrial Average is up well over 108% from the bottom in March 2009, while the S&P 500 is up about 118%.
I know, it sounds easy to say that. Most people took the ride down and, hopefully, back up. So it feels like five years of lost time. For many investors, it was.
But consider the risk most small investors face in this scenario. Alarmed at the prospect of losing money, many of them sold on the way down or, worse, at the very bottom. Once the Dow takes a 50% plunge, it certainly looks like another 50% plunge is just ahead. Dark days indeed.
And that’s the problem. Investors have the idea that stocks only go up, up, up. Such extreme volatility is understandably upsetting. When you are young and socking money away in a 401(k) or IRA, it can be easy to ignore the markets ups and downs. You don’t need that money today, tomorrow or next year.
When you’re in your 40s or 50s, the whole ball game changes. That pile of assets suddenly has a purpose — your retirement. Even minor dips seem disastrous.
That’s why financial advisors commonly tell their clients to put a large portion of their savings into fixed-income assets, such as Treasury bonds. Such “risk-free” return is not exciting, but it can help govern the most dangerous moving part of any investment portfolio — a nervous owner.
What small investors need to learn now is that bull markets happen. They happen without warning and without an invitation.
Many people, for instance, probably felt that selling their stocks in the early fall of 2012 was a prudent move. After all, just ahead was a presumably closely contested U.S. election, then the fiscal cliff and the debt ceiling, ad nauseam.
Right around Election Day, stocks did dip hard, down to 1,353 on the S&P 500, from well above 1,460 or so a month before. Yet few of those investors had the foresight to reinvest on the election result.
And stocks since mid-November have been on a tear, whatever the outcome of the national debt issue.
Most importantly, over the most recent 12-month period the S&P returned 13.5%. If you went to cash in the summer and stayed there, you missed a huge bull run of 10.6% over just six months.
What’s the solution? For the vast majority of folks, the key is to start ignoring the pundits and the news “sources” that claim to know exactly what will happen next in the markets. They often are horribly, and dangerously, wrong.
Instead, it pays to own a mix of asset classes and to rebalance them on occasion, capturing gains as they happen.
It doesn’t take a crystal ball, just common sense and a touch of discipline, as well as a strategy for keeping costs as low as possible.