This article could be consider “Part 2” of the article I posted a few weeks ago, Is It Time for the Market to Crash
Write it down: March 5, 2013 the Dow reached it’s all-time high at a close of 14,253.77. Remember the last “all-time” high? It was in 2007, October to be exact. The bear market low of 2009? That was almost exactly four years ago, March 6, 2009. So the question becomes: Is now the right or wrong time to invest?
First, let’s take a look at where we are. The markets are up over 100% since the Great Recession, but why? Isn’t the economy still in shambles here and overseas? Job growth is anemic, currency and debt issues abound, right?
True. All true. But stocks aren’t priced based on what the currency markets are or aren’t doing. They’re not priced based on the trade balance between Argentina and Botswana. They’re priced based on expectation of future earnings. It’s that simple.
Or it’s not.
The Case For Now IS The Right Time To Invest
There are of course, other factors – for example, stocks have been (and probably will continue to be for a while) a better overall value than bonds and other fixed income securities like CDs. Interest rates continue to be low and investors are generally tired of their paltry 0.50% interest on their cash in the banks. Just this week I had a conversation with a client who has $50,000 in cash reserves, earning a whopping 0.75% dividend at his local bank. Those factors also drive stock prices higher.
We should ask this question: How are the largest companies of the U.S. and the world doing? Some other questions that will lead you to a rosy future: Look at free cash flow (that’s at an all time high) corporate balance sheets (exceptionally flush with cash) company stock buy-backs (trending higher) dividend payouts (and the ever increasing rate of those payouts).
That mutual fund of yours? Based on these numbers, it appears we’re headed higher.
The Case For Now ISN’T The Right Time To Invest
That doesn’t mean there won’t be major pullbacks. A few weeks ago, I talked about having a “It’s time for the market to crash” kit ready to go. Investors are piling money into the market again after sitting on the sidelines while things looked lousy, and that’s not a good sign.
Just because you’re planning for a pullback doesn’t mean you can’t also be planning for the next leg up. As I talked about then, planning is important, but plans are not. (So said the wise Winston Churchill…just a few years before I wrote it here).
My Overall Take
When I evaluate the strength of earnings potential of the greatest companies here and abroad I see great things ahead. That doesn’t mean there won’t be market swings. It doesn’t mean there won’t be a pullback of some kind. But when I look to the future, I see a world that continues to get bigger, faster, and stronger, and I’d rather own the companies that are leading the charge.
So yes, now’s the time to invest. But so was yesterday and the day before and so it will be tomorrow. As long as you believe in the future and think tomorrow will be better than today, it’s always a good time to invest. Don’t stop your investment plan because of CNBC hype or Wall Street Journal headlines.
…but, if I’m wrong – and Lord knows I probably will be more times than not – I’ve still got a back up plan on the shelf ready to execute at a moments notice, and you should, too.
OG!!!! Now, I’m more confused than ever! I guess I’ll just have to make sure that I’ve got my backup plan in place. 😀
I had a feeling this would be your take 😉 “So yes, now’s the time to invest. But so was yesterday and the day before and so it will be tomorrow”
I agree that it makes sense to invest over a long period of time. We have little control of the macro-level events that push investments up or down.
Personally I think the time to invest was last year and the year before. I entered this year fully loaded in good quality equities and am glad I did. The “irrational exuberance” we see in the markets right now worry me a bit but all that money sitting on the sidelines had to flow back into the market at some time, and that time is now. This is one of the reason that I recently posted articles on the Stop Loss and about running with bulls or lemmings. I think that if you have good gains you should be protecting them now, either with stops or by pulling money off the table. Having said that I also think that there will be good opportunities to enter the market during this bull session. But overall, I think the balance of my focus will be protecting what I have and taking advantage of the corrections when they occur.
I think if you wait for the perfect time, you’ll be in the retirement home, the state Medicaid one, so any time is better than not at all.
Great post! I’d have to say that I completely agree with Kim, if you wait around then there’ll never be a good time to invest. I know watching the talking heads can be entertaining, but you have to do what’s right for you and have your planning in place to act if need be.
Yeah it’s time to invest it’s also time to buy a house and cash in your 401K for a trip to Tahiti.
Don’t worry everything will be awesome.
The market won’t CRASH like a MOFO right before OBAMA leaves office.
Don’t worry about that it’s all taken care of, go forth buy stocks go ahead it will be hilarious.
Dude, you’re hilarious. I love it when you comment. Seriously, it’s like the circus.
I certainly agree with the thinking that “it’s always a good time to invest”, but then you probably expected that from me. Especially if you have to option to go short then there is always a lot of potential opportunity available as long as you properly plan things out.
The greedy part of me wouldn’t mind some downside though, if only because markets tend to fall faster than they rise.
My take is no one really knows, but I will continue to dollar cost average into the market. I have been doing this for years during good and bad times. I admit my asset allocation has some safer choices to reduce the volatility.
Great insight and perspective. There are some individuals (and rightfully so) that believe the world is coming to a collapse. However, commerce and business will thrive through ANY disaster if you give it time. I thoroughly believe that this market has much higher to go, but will suffer a crash at some point. The best thing individuals can do is learn how to properly value companies.
Since I am nowhere near retirement age, I don’t worry about timing the market. I am always investing in the market and by dollar cost averaging and rebalancing quarterly, I minimize the impact of market ups and downs. Personally, I believe it is a mistake for the average investor to time the market since most professional investors are unable to do so.
Agreed, Paul. The average investor return is anemic because they try to time the market and prove over and over again that their biggest enemy is themselves.
Stocks sure are more expensive today than a few years ago. I think that while timing the market is hard to do, it’s a good idea to rebalance periodically. The percentage of one’s portfolio in stocks has probably increased a fair amount of late. Rebalancing is one way to mitigate risks.
“Just this week I had a conversation with a client who has $50,000 in cash reserves, earning a whopping 0.75% dividend at his local bank.” — You’d be shocked at the cash reserves sitting in my business checking account. But in my defense, I may need to deploy that cash within the next 30-90 days. So … there. 🙂
I agree with your take. In the long-term, the future is bright. In the short-term, there will be volatility. Hang on, kids! It’ll be a bumpy ride!
Great post, and great job of laying out both arguments. Very clear and helpful. Looking forward to more on this subject!