“Is it a classic sell signal? The answer is unequivocally, yes.” David Rosenberg, chief economist at Gluskin Sheff & Associates (Toronto)
Quoted in the January 22-24, 2011 Wall Street Journal, Intelligent Investor column by Jason Zweig. What Mr. Rosenberg was referring to was the rush to invest in stocks by the retail investor, that’s you and me, now that the U.S. stock market has nearly doubled! Read more about this contrarian investment signal.
MAIN TOPIC; Sheep to the Slaughter
Have any of you heard of the tulip mania in Holland several centuries ago? What about the tech boom at the end of last century? I think you know where I’m going with this one.
The power of the crowd is overwhelming. If others are participating, then you must get in the game as well. Beanie Babies for your kids in the 90’s, gotta get them. iPhone, you’re a loser without one!
In investing, if you wait until there’s lots of evidence that the stock market is going up, you missed most of the upside.
What’s the investor to do?
There is HARD EVIDENCE that jumping in and out of the market is deleterious to your returns.
Return on lump sum $10,000 INVESTMENT in the S & P 500 Index from
January 1, 1980-December 31, 2010
Beginning value of investment
Ending value of investment
Annual Rate of Return
|$10,000||Remain invested the entire time$280,740||11.36%|
|$10,000||Miss the best 20 months during the period$45,687||5.02%|
Miss the best 20 months of the last 20 years; lose out on $235,053 profit.
Are you smart enough to consistently pick the best months in which to invest? Not likely.
PRACTICAL APPLICATION; Start Investing Now and Do Not Time the Market
Over time, only a small percent of professional money managers ever beat the returns of the unmanaged stock market indexes. And those lucky managers, who beat the market one year, are unlikely to repeat their outperformance the next.
The best chance of meeting your future financial goals through investing in the stock market is this:
- Choose some low cost index funds or ETFs in percentages appropriate for your risk tolerance.
- Invest regularly, through ups and downs.
- Every year of so, adjust the percentages of each asset class to fit with your original allocation.
Go on about your life. No worries about getting in at the bottom or out at the top.
Look, I know there are some of you out there who like to research individual stocks, and if you have the time, knowledge, and patience, you may be able to boost your returns a bit (or maybe not). But realize this, the evidence is against you. If stock investing is a pleasurable activity, by all means, allocate some of your cash to individual stocks. Just make sure to diversify your holdings so one bad decline doesn’t sink your whole portfolio
Tune out the noise of the day to day market movements.
The smart money does not follow the crowd, as Rosenberg implied.
Just to be clear, I’m not recommending you follow his advice to the letter and sell now. Keep your head, act reasonably, in accord with the evidence, remain diversified, and over time, you will become wealthy.
Make sure you read 10 Steps to Take Before Investing, first.
What are your investing lessons learned?
Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
- Think before you follow the crowd. That goes for life as well as investing.
- Check out the Carnival of Passive Investing at My Personal Finance Journey for a wealth of smart investing ideas.
- Remember to understand how social security strategies will influence your future wealth.
- Consider this low interest rate environment to refinance your mortgage.
image credit: gnuckx