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Tue February 19, 2013
Should you buy stocks while the market is high?
Financial commentator Greg Heberlein firmly believes the stock-market axiom that says "history repeats, but never exactly". So when he see the market at or near record highs, he gets nervous. Conventional wisdom is that individuals buy near the high and sell near the low.
What’s an investor to do? Greg and KPLU’s Dave Meyer look for answers on this week’s Money Matters.
Highs and lows in the market are extremely hard, if not impossible, to predict. If they were easy, we’d all follow such predictions and see our portfolios soar.
Neither can we predict coming natural disasters, financial collapses, international revolutions, or domestic political calamities. We can go only by what we know. We know the stock market is remarkably high. Any of the preceding potential negatives, plus possibilities we can’t even imagine, can scuttle the market.
So let’s concentrate on what we do know.
We know the economy is expanding.
We know corporate profits continue at record levels. We suspect unemployment has peaked and more people are going back to work. We know lawmakers are at least hinting at compromise on reducing the national deficit.
We also know that interest rates remain insanely low. They can hardly drop more, and are more likely at some point to start climbing.
When interest rates rise, individuals will have more money to spend, thanks to better returns from certificates of deposit and other savings vehicles.
Then there's the $2.7 trillion stuffed into money-market funds.
Because it takes a microscope to measure the minuscule interest those funds are paying, more and more investors will consider returning to the stock market.
We know many already are. In the five years since the market’s 2007 peak, a stock-market outflow of more than $400 billion occurred. But at least $66 billion has come back. It takes many years to persuade those who have been burned to try it again. But, gradually, it will happen.
What should individual investors do?
If you aren’t already doing it, consider dollar-cost averaging.
Invest a set amount of money on a regular basis. Get a pay raise? Add to the set amount. By doing so, you smooth out the tops and bottoms, avoiding the big buy at the top and the big sell at the bottom. And you don’t have to be swayed by market pundits or the emotions rattling in your own mind.
That puts you at the average.
Don’t want to accept the average? Consider this: the average annual rise in the stock market is 7 percent, or perhaps closer to 10 counting dividends.
At 7 percent, you double your money in 10 years. At 10 percent, you double in seven years.
That’s not a bad deal.