November 14, 2013



Investors really love stocks, and because of that the stock market is hovering around an all time high. A record $45.5 billion flowed into mutual funds and exchange traded funds in October, the fifth highest amount in any month on record. So far this year $277 billion has moved into stock funds. This is the largest amount in any one year except the year 2000.

Investors were really excited about stocks back in the year 2000 just as they are now. To refresh your memory, the market from the beginning of 1997 to the end of 1999 soared almost 90%. The three years beginning in 2000 to the end of 2003 saw the market go down about 35%.   

In the last three years stocks are up around 50% and since the low of the market on March 9th2009 stocks are up about 100%. History shows that every time the stock market is down significantly individual investors pull money out and after it goes way back up they stampede back in.

It doesn't sound rational, and it isn't but individual investors invest with their heart not with their head. So when I hear investors say they are scared of the stock market I know why. They have been burned at least twice in the last 10 years by jumping in and out of the stock market at exactly the wrong time. And it is about to happen again. Those who were scared out in 2008 -2009 now see how much the market is up and they are jumping back in at a record pace.

It has been 5 years since the Dow Jones Industrial Average hit 6,626 after falling from 14,000 in late 2007.  Now it is 15,600. History is working against the emotional investor. Every investment that is stock related is up 80, 90, 100% or more in the last 5 years. Even the worst performing, highest cost piece of junk stock mutual fund looks like really good deal to the average investor right now. Who wouldn't invest in something that is up 80%?

I am not saying the stock market is going to have a major decline soon, but those investors who missed the last 80 to 100% move up and just put money in the market this year are the emotional investors. They bought at such a high level that the up-side is limited and any little hiccup in the market is going to scare them into selling. So, once again the stage is set for the emotional individual investor to buy stocks when they are high and sell them at lower levels. And after it's over they will all say the stock market is rigged, I am never buying stocks again!

The stock market is truly rigged against the little guy. Not because Wall Street and the insiders or the fat cats are stealing all of their money, but because of the average investors own emotional investing habits. Professional investors are only taking advantage of the gift that all of those scared little investors are giving them every time the market tanks. 

So what should you do? If you can't grasp the concept that at some point in time the value of the stocks you own are going to go down a lot - don't buy them - ever! If you truly can't afford to lose any money or are going to need the money in less than five years- don't buy stocks!

If you think you can time the stock market and jump in and out at the right times good luck. History has shown no one can do that consistently. If you don't get it right almost every time you will lose money in the long run.

There is one strategy that brokers have been pushing since stocks have existed, a strategy that I bet most of the readers of this column are firm believers in. This strategy has worked for decades only because it keeps investors from selling at the worst times. It is called buy and hold.

If you just buy any old diversified stock mutual fund and don't ever sell it history has shown that you would have done very well. But remember you are not a genius. The market is at an all-time high. Anytime in the last 20 or 30 years you could have thrown a dart at the Wall Street Journal's stock market mutual fund page and as long as you just held on to the fund that dart landed on and did not sell it you would have made a lot of money.  

Buy and hold is better than no strategy. It's a good strategy if you have no discipline and it's good for brokers too. They don't have to do any work. Brokers just sell you a mutual fund and every time the market goes down significantly they say "just hang on".

 If you really want to make money in stocks modify the buy and hold approach. Be a contrarian. When everyone is panicking and selling stocks, buy a little bit more. And when everyone is buying wait until the buying drives up prices well beyond any rational valuation and then trim your position in stocks.

Bill Oldfather offers fee-only money management and personal financial advice. Oldfather Financial Services, LLC is located at 2033 Central Avenue in Kearney Nebraska. Email