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Thursday, February 28, 2013

Is This a Good Time to Invest in Stocks?

The headlines blare "Market at 5 Year High."  Graphics on CNBC and Bloomberg Television track points required to get Dow Jones to an all-time high.  Giddiness abounds.  All of this in the face of D.C. craziness, European nuttiness, and economic weakness domestically and globally that could reasonably be expected to slam markets to the mat and get a 3 count.

Individuals as well as professionals built up cash balances, missed the push higher, and returns suffered.  And we know what cash is earning these days.

So, not surprisingly, advisors get the question more frequently these days of whether now is a good time to get into the market.

The people asking the question remind me of people at a swimming pool.  There, you find some people dive right in and others will gingerly walk down the steps at the low end, proclaim "ooh, it's cold," back off, go back in, etc., and take 30 minutes to get in up to their waist.  Each has to be treated differently.

Joe and Suzy Wannabinvested

Take Joe and Suzy Wannabinvested--a couple in their mid-40s.  The first thing I emphasize, and I try to pause dramatically in doing so, is that what they care about is where the market is 25 - 30 years from now--NOT WHERE IT IS GOING OVER THE SHORTER TERM!

Some Joe and Suzy Wannabinvesteds seem to think I am a psychic.  They want me to pull out a crystal ball and say "ooh, look at this, the market will be a lot lower 6 months from now. That's when you should get in."

Sorry, can't do that!

So what can I do to get people started?  First of all, we talk about asset allocation.  Joe and Suzy need a model that specifies percentage to be invested in stocks (big cap, small cap, international, etc.) and bonds and cash.  That's the goal. 

Secondly, we need to find a way to comfortably get to that model.  I suggest all in* (especially if they are making regular contributions via a 401(k) and they are not close to drawing on the funds); but if Joe and Suzy are more comfortable going piecemeal, that is better than doing nothing.  I have in mind a man from several months ago who desperately wanted to get into stocks but couldn't pull the trigger.  I pleaded with him to start by just putting one third of his targeted allocation in - to just stick his big toe into the water.

Alas, the news was just so bad; and he was absolutely sure that a better entry point was down the road. As far as I know, he never got in.  I do know that a better entry point never materialized.

In the course of our discussion, he made an interesting comment.  He said, "I couldn't stand it if my portfolio was down $6,000 over the next month."  This elicits a couple of important points:  (1) You haven't made anything or lost anything until you draw funds from your account or realize gains or losses, (2) possibly this man shouldn't invest in stocks at all.  Point (1) is true on the upside as well as the downside.  Take the case of Apple, as an example.  Think of all the braggarts proclaiming how much they made when the stock was at $700.  Point (2) recognizes that investing can be an uncomfortable undertaking as, for example, flying can be.  There are some people who should do neither.

*There is a difference between setting a record price and a record valuation metric.  In particular, if the headline one day becomes "S&P 500 P/E ratio at all-time high," I will definitely trim back and be more cautious.

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