“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 fromJanuary 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?
ACTION STEP:
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
Great article. The market looks a little expensive to me. Everyone is rushing to get in. That’s always my clue to slow down my investing. Many of the bargains have disappeared.
Mark, You are a wise man. Following the crowd is rarely a profitable strategy
I just invest every month without a thought. I don’t have the time to do all the thorough research to even be nearly qualified to attempt to ‘time the market’, so I just dollar cost average.
Everyday Tips recently posted..Link Round Up- Superbowl Edition
@Everyday-Research shows that you will beat the majority of all investors with the approach of dollar cost averaging a majority of the time.
I’m kind of worried about the markets, yet I’ve continued to just put a little bit in here and there. I’m so bullish on the employment picture, hence I don’t think we will have any major correction (10%+) at all.
Financial Samurai recently posted..Is Unemployment Really That High
I just don’t believe in selling because of what the market is doing. I will sell some of my stocks if I want the cash for a downpayment on a house maybe, and then I would pay attention to when the market is up or down for a few months when deciding when to sell, but I’m not going to sell only because my funds are up.
Kellen recently posted..The first month of busy season
@Financial Samurai-Although I’m not big on making predictions, what you suggest certainly sounds viable. Also, as long as you don’t need the invested funds within the next 5+ years, regular investing for long term needs is usually a sound wealth building strategy.
@Kellen-Agreed! Very sound thinking. Keeping an asset allocation strategy in line with your risk tolerance through market ups and downs is a solid long term investing approach.
Very true Barb! Good asset allocation with regular rebalancing is the key. You may be successful in timing the market, but that’s not a long term solution!
Keep a small amount for speculating if you must, but dont’ gamble away your core portfolio.
Moneycone recently posted..What Is Your Best Day-To-Day Savings Tip Round Up
Some great and very sensible tips here! Thanks for the mention on the Carnival of Passive Investing! This might be a good candidate for submission this month eh?
Jacob @ My Personal Finance Journey recently posted..Using Your Tax Refund to Pay Premiums Is Like Getting Free Life Insurance!
This is great advice Barb.
Dollar cost averaging, especially for new investors, is a sound investment strategy. It takes a lot of courage to keep investing during a major recession, but it pays off. It’s also important not to go overboard when the market is hot and getting ready to correct. Investing a set monthly amount helps on both counts.
@Moneycone-Thanks for pointing out that if you want to speculate, do it with a small amount, and do it deliberately.
@Jacob-Good idea-I will keep this one warm for the next Carnival of Passive INvesting
@Bret-The most money is made dollar cost averaging when prices are low… although it’s hard. Historically, it’s how the greatest amount of money is made.