Who Cares About Where The Stock Market Is Headed?
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Lemoncat Your online stock broker may have told you that this was the time to start buying into the market. On the surface, yes, it is a good time to buy in. Long term investors with an investment horizon longer than 10 years should be well served by shoveling their long term money into equity funds and stock accounts.
But where's the market headed next? Lots of investment experts are offering a variety of stock market predictions, and while this market goes on to make and break a few careers, you know that whoever gets it right will be congratulated profusely for their prescient calls and intuitive forecasts.
Before you lend a financial guru your full attention and decide to hitch the fate of your nest egg to their prognostications, I thought to give you an argument for each possible direction the market can take; my premise here is that it's tough to really say which way the market winds will blow next. There will always be a risk if you time the market, so market timing is something you should only try if you know what you're doing.
Care to guess which way the market will go next? Here are some arguments that may support each possible move:
Why The Stock Market Will Go Up
Some of the bulls out there will celebrate the apparent revival of the market. The rally we're seeing has experienced a strong, solid momentum upwards as it barrels its way north from recent dismal lows. There was a lot of money sitting by the sidelines now returning into equities. Was the market truly that oversold and are we now swinging towards its more natural equilibrium? Is President Obama really doing that great a job with restoring our broken confidence as investors? Here's why the market may be on its way up for good: economic analysts are saying that we'll begin to see the economy recover by next year. And historically, the stock market has typically moved up many months in advance of any anticipated economic recovery. But who knows, the bulls may still be celebrating prematurely.
Why The Stock Market Will Slide
The bad news bears claim that the stock market rally won't last and we're contending with a bull trap. They point out that grim market conditions and poor economic fundamentals haven't yet changed significantly to merit any improvements in the indexes. Although we're seeing a strong uptrend right now, many experienced investors point out that established stock market bottoms are normally revisited and retested before the market resumes a true bullish run. If volume starts to dry up the higher this market goes, then watch out below!
Why The Market Will Stay Flat
This volatile stock market doesn't seem very "flat" given its recent intense action lately. But "flat" can also mean that the market just backs and fills in a given range without making progress over a long period of time. Is this scenario possible? Sure. This is what happened after the relentless bear market of the 1970's. With the market stuck in a narrow range for most of that decade, it was clearly a frustrating time for stock investors; if you invested in stocks in the 1970's, it was "dead money". Such a time can also be likened to what happened in Japan in the 1990's. I can't help but note the parallelisms in place between the US credit and mortgage crisis, and the real estate collapse that triggered Japan's "lost decade".
What Should Investors Do Now?
Because I know not what will happen next with the stock market, and don't really trust what others have to say about it, I can only bank on the investing strategy I've staked my money on for two decades now. I've stuck with a fairly conservative asset allocation; I've employed dollar cost averaging and portfolio rebalancing to manage my market risks while giving my portfolio a shot at experiencing some modest growth over time. If you have long term funds (such as retirement funds) that can remain in the market for at least another decade, then investing in equities is a reasonable move. Just as long as you've got yourself in diversified assets (cash, bonds, stocks, and possibly a small amount in real estate, commodities, precious metals) and keep the proportions set according to your risk profile, age and financial goals, then you should be in a decent position. I assure myself that I'm doing the best I can given the current market environment by managing a balanced portfolio that's built to withstand volatility. Now I only need some patience to get over this hump.
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I, like you, have 20 more years before retirement. I have left all but 10% of my portfolio alone during this downturn. I am thinking long term and do believe this time next year we will be at a whole lot better place.
Nice article.
If there was only more coverage on how nobody knows where the market is headed. I think that would make for an interesting 30-minute show.
None of your prognosticators predicted this economic tsunami so why should we believe their predictions about the future. Oh, and after the last Great Depression it took 25 years to break even in the stock market. So much for your ten year buy and hold strategy.
Dollar cost averaging is a good strategy as in most of us don't want to spend our life watching stock tickers.
But can make reasonable effort and within what an average person can do is to stop dollar cost averaging when the stock market is clearly overheating and more dollars to invest when the market like now is clearly in the downturn.
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"None of your prognosticators predicted this economic tsunami so why should we believe their predictions about the future. Oh, and after the last Great Depression it took 25 years to break even in the stock market. So much for your ten year buy and hold strategy."
First of all, there were people who predicted it. Not too many of them, but several.
One thing about 25 years to break even after the Great Depression: this 25 years number would apply to you if you had bought all of your stocks at the peak right before the crash and hadn't bought any stocks since then. If you run the numbers based on continuing income averaging during the 30s and 40s, the break even year would be much sooner - around 8 years. Try it. Also, this number doesn't include dividends. The dividends were a big thing - some of the companies at the time were paying double digit dividends.
Also, banks didn't provide much safety back then and people who kept their money in some banks lost everything.
Another thing to keep in mind is the large deflation between 29 and 33 with the consumer index dropping by 27%. So if you held one or two stocks that dropped by less, the purchasing power of this same money would've increased.
One other thing to keep in mind about the indexes back then: they comprised a lot fewer stocks than now. Some companies did very well during the depression - e.g. IBM, Procter and Gamble. Yet in 1939 for some strange reason IBM was removed from the DOW and not added until many years later. Some estimate that had this not happen DOW during that same years would've been twice as high.
Nobody really knows where the market is going. Markets are risky. But cash isn't safe either. What if this printing of money government is doing causes huge inflation? How much will our cash be worth then? Thinking of buying commodities instead? But what if we have deflation because nobody is buying anything?
Face it, no matter what you do, it's risky. I personally, have about half in market (including energy and commodities) and half in cash and bonds (not just government infaltion-protected, but also a little of municipal and corporate bonds). Is this correct? I have no idea... One thing I think we all should learn: buying and holding stocks or buying indexes is not an excuse for not paying attention to economy and not thinking about what is right for each of us individually.
We're just staying all in and contributing as much as possible. We still have 30 years to go until retirement. I don't think we're going to see fast recovery. I think we'll be stuck here for a while. I'm crossing my fingers that investing now will pay big returns in a few decades.
Unfortunately, we should all care about the stock market. It impacts our lives in many ways-- prices, rates, jobs, etc.
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