Thinking About Jumping Into Stocks? ... Then Think About This, Too

The stock market has been on a tear during the past ----- 100 years or so. And the past few years as well. But stock prices do not follow the path of a straight line to the sky.

Occasionally, they hit the wall and come tumbling down, Humpty Dumpty style. But then, and unlike Humpty Dumpty. they get back up, dust themselves off and resume their long term climb.

That's what history teaches, but there's something else history teaches as well.

People have a tendency to buy high and sell low. They also are unduly influenced by 'experts' and tend to trade excessively as well as at the most inopportune times. And they also pay commissions and fees to those 'experts,' even though the share price appreciation and dividends weren't in any way the result of what the 'experts' did. To the 'experts' it's unearned income and to the individual investors, it's unnecessary and avoidable expense, in other words

So for those of you who are thinking about buying into the market now, ask yourelves this: Will you panic and sell when the inevitable downdraft hits, or will you stay the course? And if the answer is that you'll be likely to sell when the fit hits the shan, don't buy.

That said, for long term oriented DIY individual investors, come on in because the water's fine. And it always will be for those investing for the long run.

Mom and Pop Run With the Bulls has this to say about the wrongheaded behavior of individuals when it comes to investing for the long term:

"The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.

 

Lucie White and her husband, Mark Villa, at breakfast with their children. Out of the stock market since 2008, the couple have gone back in.

This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

"What really tipped our hand was to see our cash not doing anything while the S&P was going up," says Ms. White, a 39-year-old dermatologist in Houston. "We just didn't want to be left on the sidelines."

Ms. White and her husband, Mark Villa, a reconstructive surgeon, are joining other individual investors in overcoming their fears after watching stocks recover all the ground lost during the financial crisis and more.

So far this year, U.S. stock-focused mutual funds—the traditional domain of mom-and-pop investors—have taken in a net of $33.6 billion, according to Lipper. That is a small reversal compared with the $445 billion that they pulled from domestic stock mutual funds from 2007 through the end of 2012. But many on Wall Street think that trend will likely accelerate in coming months, particularly if the stock rally continues.

So far, most of the gains have been powered by big institutions and professional traders, whose buying helped push the blue-chip Dow to a gain of 11% in the first quarter of the year, which ended last Thursday. That rally, which also pushed up the S&P 500 to a record last Thursday, is the best start for the Dow since 1998. . . .

After the long bull market of the 1980s and 1990s, the first 10 years of this century have become known on Wall Street as the "lost decade." The S&P 500 finished 2009 down 24% from where it was a decade earlier, thanks to a pair of vicious bear markets.

First came the collapse of the technology stock bubble starting in March 2000, which saw the S&P 500 tumble 49% to its nadir in October 2002. Then from its peak just before the financial crisis in October 2007, the S&P 500 slid 57% to its March 2009 low.

Some market watchers point out that Main Street investors tend to embrace stocks with enthusiasm only after major rallies like this one. That exposes such investors to the risk of buying near the end of a rally—and suffering when stocks turn lower.

But in mid-March, big-time stock-market strategists at Goldman Sachs Group Inc., Morgan Stanley and other financial firms fueled further optimism by predicting an even higher surge. They cited stimulus policies from central banks around the world and the likelihood of strong profit growth as economies heal."

Summing Up

Here's the deal.

For those with a long term perspective and investing horizon, as well as the temperament to hold on during the inevitable periodic market downturns, you should own stocks for the long haul.

But for those who will be inclined to cut and run when the inevitable periodic market downturns hit, you shouldn't own stocks at all.

And for everyone deciding what to do or not to do about investing in stocks, you should review the history of share prices and stock markets over time.

The facts are indisputable. Unlike real estate, bonds, gold and other alternative investments, over time stock prices will rise at a much greater rate than inflation.

But this fact is indisputable as well. From time to time, stock prices will go down with a thud, just like Humpty Dumpty did.

But unlike Humpty Dumpty, stock prices will rise again and reach new heights which were previously unimagined.

That's what MOM based share ownership is all about --- that and protecting and enhancing the inflation adjusted purchasing power of our hard earned savings over time.

That's my take.

Thanks. Bob.