THE RISK OF COMING LATE TO THE MARKET RALLY

By Richard Hitchcock

With the current equity markets and bond markets in record high territories, it may be timely to review your current investment strategy.

Let’s say you have been talking with some friends about investing and one of them starts bragging about how much they have made recently in the market. You don’t think much about it until you turn on the TV that night and see that the markets have reached another record high. So you begin thinking that, while you’ve never really thought much about the market, you want your assets to grow like that (took out comma) too. After deliberating awhile, you jump into the market.

Or, conversely, you have been in the market for some time and lately the market has been going down. Every day seems more pessimistic than the day before. Finally, you can take it no more and you sell.

 

These scenarios happen often, particularly when the markets have had a long run or either good or bad returns. The emotional side of investing kicks in and often times overrides reason. That’s why it is often the case that individual investors don’t do nearly as well as the markets themselves. In fact, many studies have been done that show this, including a recent study by Morningstar1.  And, as quoted in that article, the founder of Vanguard Funds, Jack Bogle, says, emotion is the enemy of the investor.

 

So, what can you do? In the first place, it is important to understand yourself and your risk appetite. Then, set a course. I liken it to driving a boat. It is difficult keeping a boat in a straight line over short distances. What is necessary is to pick a point on a distant shore and keep truing the boat to that point. It is the same with investing.

 

That’s not to say you shouldn’t make changes. But, following the herd and coming in late to the investment party might not be the best time for those changes. Warren Buffett, the famous investor, says, “Be fearful when others are greedy and greedy when others are fearful.” Most people are good at “sale shopping” at the department or grocery store yet reverse that mentality in the market. Be ready and opportunistic.

 

In the current market, be aware that both the equity and bond markets are in record territory. That surely isn’t a reason that they won’t continue to move higher (higher stock prices, higher bond values, i.e. lower interest rates). No one truly knows. But, at least in the past, nothing continues forever and, in the parlance of statistics, things revert to the mean.

That’s a fancy way of saying “What goes up, may (will?) come down.” And, if you are correct about the ultimate outcome, your timing may be off. As one market wag put it, “The markets can stay crazy longer than you can stay solvent!” So be patient, stick to your investment strategy or develop one if you don’t have one. Most importantly, make sure your strategy and your investments align with you risk profile.

 

Instead of coming late to the party, let the party come to you. As Wayne Gretzky, the famous National Hockey League player, said when being asked the secret of his incredible success, “I skate where the puck is going; others wait for the puck to come to them.” 2

That’s good advice for investing!

1 http://news.morningstar.com/articlenet/article.aspx?id=325664

2 http://EzineArticles.com/1347138

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