When to Pull the Trigger
There is a special psychological barrier for those contemplating the purchase of U.S. equities — long-term investors and traders alike. The memories of losses in the 2000 era are still fresh. Those who do not study the fundamentals of market valuation — forward earnings and interest rates — see a market reaching the old highs as a sign of danger.
Consider the following key facts:
- In the long run, stocks outperform bonds;
- The current expected yield from stocks is significantly higher than the risk-free bond yield; and
- The overall market, and many of the most attractive growth stocks, have now pulled back significantly from recent highs. (We see many attractive stocks.)
We talk with many individual investors, nearly all of whom have lagged market averages in their own accounts. The biggest single mistake is that they can always find reasons not to invest. One very intelligent person was referred to us in 2004. He was worried about the outcome of the Presidential election. That was about 30% ago in the S&P 500, but he was buying condos instead. He still does not own any stocks.
There are always many things to worry about. The leading Internet financial sites emphasize the "wall of worry." Unfortunately, they do not explain it. A market plagued with many concerns, like this one, is actually the best opportunity. When the issues are known, market prices reflect the worries.
How NOT to Act
Here is what we often see.
The market makes new highs. The investor says, "It is is too late. I missed the best time to get in. I can’t chase this. I made a mistake earlier, but I cannot buy now."
The market pulls back. The investor says, " Wow! I’m glad I did not invest a month ago. There are plenty of problems. Look at the selling. The market is going lower."
Notice that the investor cites the direction of the market when it is moving lower, and the level of prices when it has moved higher..
Using this approach there will NEVER be a correct time to invest.
The best approach for investors is to have a disciplined method. This can be based upon fundamentals or system.
But this is easy to say. We know that the real problem is getting started. So here is our best investment advice as 2007 comes to an end:
Do something! Buy a partial position.
This is what the pros do when in doubt about timing. Establish a position. If prices go lower, you can buy more. If prices go higher, at least you are participating in the gains. This is much better than following a method that leaves you permanently on the sidelines.