Look out. Here come the individuals.

Osbon - November 26, 2013

This week’s article is written by guest author, Steve Mott. Steve is a long time editor for Osbon on the Money.

Individual investors are pouring money into the stock market again.  It’s been a long wait.  Many bailed out during the financial crisis at its worst, and have been waiting for it to be “safe” to invest again. Now with the major indices making record high after record high, they’re back in numbers not seen for years.

Some would argue that after bottoming out at 666, it might have been safe to get back into the S&P 500 at, say, 1000. Or 1200. Or 1400.  Certainly it was safe at 1500 a few months back, or 1600.

But no, Johnny Public waited for more and louder signs of the all-clear. With the index near 1800 now, apparently the horn has sounded and here he comes. He thinks it’s safe.

But he’s wrong.stairs

Not now, not ever.
There is no safe time to invest in stocks. And that’s the whole idea! If you want a safe investment, you’re stuck with tiny-return Treasuries. In order to get a higher return you must accept a higher level of risk. Stocks are always risky because they can go down. Way down. At any time. Like down 37 percent in 2008.

They can also go up. Way up. At any time.  Like 170 percent since the market bottom in March, 2009.  Or about 30 percent in the last year.

The individual investor often gets a bad rap for being late to buy and early to sell. There’s research that shows that always doing the opposite of what small retail investors do is a pretty good investment strategy. However, instead of basing decisions on what individuals are doing or not doing, I’m more inclined to follow the principles set forth by Professor Eugene Fama of the University of Chicago, who won the Nobel Prize in economics this year:

  • Don’t pretend you can look at a stock or an index and be certain that it is priced too high or too low.
  • Don’t try to time buying and selling based on hunch or on what others are doing.
  • Trust that stock prices are more or less fair at any given time – that any and all information about a company and its future – is already priced in.
  • Expect that over long periods, a diversified basket of stocks will generally go up.
  • Accept the risk of putting some money in stocks, because that risk means there is potential reward too.

But what kind of proof do we have that stocks go up over time? Well, only 87 years of US market history. One dollar invested in small stocks in 1926 is worth well more than $18,000 now. See: Andex Chart

And the compounding continues
The S&P 500 was in the 50’s in 1958 and first topped the 400 level in late 1991. From there it’s been a bumpy, erratic and sometimes scary trip to the current highs.

At around 1800 now, we don’t know if the next milestone will be 1900 or 1500, but if we want a chance at the higher number, we have to have money in the market.

Is it safe now?  Absolutely not.  Not for Warren Buffet or Johnny Public. And it never will be.

 

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