It’s been barely a month since Alexander Green remarked that we’re currently enjoying “the most disrespected bull market in history.” Green described how investors who were shell-shocked by 2008 were still pulling money out of equities and taking shelter in fixed income and cash. And until very recently, the financial media were fanning the flames of pessimism: a Wall Street Journal reporter called 2012 “another very difficult year for investors” even though the MSCI World Index was up over 16%.
I’m ready to declare this trend is reversing. I have no hard data, but in the last couple of weeks I’ve noticed a dramatic shift in the tone of reader emails. For almost three years, the common refrain was “I’m nervous about getting into stocks because the markets have been terrible lately.” But since the New Year, that’s changed to, “I’m nervous about getting into stocks because the markets have been so good lately.”
In case you missed the irony, let me hit you over the head with it: instead of being afraid because stocks fell sharply in 2008, investors are now afraid because they’ve risen sharply since 2009.
I don’t mean to poke fun at people’s fears. I bring this up because it’s a lesson for investors who have been waiting on the sidelines “until things settle down.” Since the financial crisis, we’ve endured rumours of a double-dip recession, a downgrade of US debt, serious macro problems in Europe, and the fiscal cliff. All those events made investors avoid equities because they feared more losses. I don’t know what lies ahead, but it might be fair to say things have now settled down. But instead of re-entering the market, these same investors are now avoiding them because they think prices are too high. So when exactly do you pull the trigger?
This is what happens when you rely on emotion to make investment decisions. A better approach is to set a long-term asset allocation based on your goals and your temperament and then rebalance according to a schedule. A strategy of buy-hold-rebalance can still be emotionally difficult, but if your asset mix is appropriate you should never find yourself on the sidelines again.