The anxiety and despair that was Wall Street just five short months ago has begun to recede. Gradually, investors are returning to investing in the stock market, thus pushing the overall market higher. We believe that there remains a large degree of skepticism about the direction of the market despite all of this seemingly renewed optimism.
We often talk about the stock market being an anticipatory vehicle and that historically advances come during the most trying of economic times. In fact, back toward the end of March, when stocks were just coming off ten-year lows, we penned an article that appeared right here in The Record, entitled “Try The Irrational.” Contained within the body of this article were a number of reasons why, despite the fact that the economy was mired in a severe economic recession, one should consider investing in the stock market. We observed that “if the entire objective of investing is to buy low and sell high, why then when investors have the chance to actually buy low and sell high, very few do?”
Fast forwarding to today, we see some sparks in the economy, specifically in housing and some of the Leading Economic Indicators. However, in our opinion, alone not enough to justify the more than fifty-percent advance in the S&P500 off its March 9, 2009 close. Jobs are still being lost, consumer spending remains soft and businesses are still reluctant to loosen the purse strings. Despite these remnants from this long, deep recession, the stock market remains steadfastly focused on what it appears as a gradually improving economy, one where at some point in time in the not-too-distant future, some of the pent-up demand in both the consumer and business sector will begin to be filled with orders.
Where do you stand in relation to your objectives? How are your assets allocated? Is your current strategy of investing appropriate for your particular situation or have you been scarred by this bear market and, most likely to your own detriment, unwilling to wade back into individual stocks or equity mutual funds? It is a fact that upon exiting a bear market the vast majority of individuals are underinvested in the stock market. Perhaps we may have indeed lost a generation of American investors.
THE BOTTOM LINE – It is important to objectively assess your own portfolio and the amount of risk involved, given the length of time remaining in which to achieve those objectives. Furthermore, it is important for each of us to try to determine their ability to withstand the emotional weight of a declining market. This “tolerance to risk” was by far the most important factor in determining which investors were able to focus on the long-term benefits of investing and which sold at or near the bottom. It is also important to learn from the past, but not live in it. Look forward and keep in mind that stocks have gone nowhere over the past decade. Ironically, this most likely bodes well for stocks over the next ten years.