A cursory look across the financial news might convince all but the hardiest investors that a crash is imminent.
Gurus earnestly warning investors to “ditch stocks now,” or something similar, are daily fare across the business side of the media. So should you be frightened and follow suit?
No. In fact, quite the opposite.
Pessimism is good. “I’ve long been a believer that bull markets are born on pessimism and die on euphoria,” says Ken Fisher, chairman and co-chief investment officer of Fisher Investments, referring to a phrase made famous by investing legend Sir John Templeton.
In between pessimism and euphoria, investors move through the emotions of skepticism and optimism.
“We are still straddling between skepticism and optimism, and we are a long way from euphoria; you can measure that six ways from Sunday,” Fisher says.
[See: The 9 Best Investors of All Time.]
Past euphoria ended in tears. In 2006 there was a euphoric mood about investing in housing, with multiple tales of people quitting their jobs to flip houses. There was an underlying assumption that the real estate market would continue appreciating indefinitely without a pullback.
Likewise, in the late 1990s there were a rash of tales about people who had decided to make their living day trading stocks. The attitude was that stock prices were heading to the moon and that there was easy money to be made by buying shares in new internet startups, then watching the stock price rally and pocketing the profits.
Both were indications of an attitude that went far beyond optimism. Both were periods that ended in tears for some people.
We clearly aren’t there yet. The headlines indicating worry are a sign of the skepticism that abounds. Among smaller investors it’s worse. They still seem to fear that there will be a repeat of the market meltdown of early 2009 when the Standard & Poor’s 500 index fell below 750. Now that index trades in excess of 2,100.
Small investors are pulling cash from stock funds. One indication of the skepticism toward stocks comes from the mutual fund data provided by the Investment Company Institute. Money is now being routinely pulled out of stock funds each week.
That’s seen as a sign of bearish small investor sentiment because about 90 percent of the time, dollars invested in mutual funds are from individual investors. Some, but by no means all, of that cash is making its way into exchange-traded funds that hold stocks.
For the savvy investor though, the sign that mutual fund investors are shunning stocks should be seen as bullish for the overall market. Small investors are notoriously bad at evaluating when to put their money into stocks.
Pros are skeptical, not scared. Wall Street money managers don’t have quite such a dim view on stocks as mom and pop do, but they aren’t euphoric.
“My view is that equities are not cheap; they are either fairly priced or potentially overvalued based on fundamental valuation techniques,” says Jason Dillow, chief investment officer at Halcyon Capital Management in New York.
Similarly, the professionals aren’t too worried about a crash either.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
“Investors and confident that the Fed and other central banks have their backs,” says Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
Many investors believe that the Federal Reserve will not make any sharp changes to the low cost of borrowing money. Low interest rates on other asset classes, like bonds, will keep stocks attractive.
So what should the small investor do? Stocks will be a good place to invest as long as sentiment doesn’t get too optimistic.
For individual investors, a good place to start might be the SPDR S&P 500 ETF (ticker: SPY), which tracks the index of big public companies. It has annual expenses of 0.09 percent, or $9 per $10,000 invested. Alternatively, there is the Vanguard 500 Index Fund Admiral Shares ( VFIAX), which has annual expenses of 0.05 percent. Both hold a broad basket of big company stocks.
But just because the stock market tends to rise over time, that doesn’t mean there won’t be periods when it will fall for a while. That’s normal. It’s when there aren’t occasional pullbacks that you should be worried, because it’s a sign that investors have become too optimistic, or even euphoric.
The real key though is not to get concerned by the ebb and flow of the market. “If there is a dip, don’t panic sell,” Dillow says.
[See: 7 Stocks to Buy When a Recession Hits.]
When there is a market pullback, don’t log on to your brokerage account and cash everything out. By simply staying invested, you’ll probably do better over the long run.
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Today’s Investors Are Somewhere Between Skeptical and Optimistic originally appeared on usnews.com
