STRATEGIES

It's not a surprise that the hoi polloi is diving back into the stock market now, only after the first warning shots of a reversal have been fired. But there are ways to invest in stocks without joining the lemmings, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.

People don’t buy umbrellas until it rains. They don’t buy overcoats until the thermometer plunges below freezing.

And many don’t buy stocks until the market is up. Way up. We’ve seen that dramatically this year, as retail investors emerged from their bond-market cocoons and jumped back into stocks.

From 2007 through 2012, they pulled $600 billion from US equity mutual funds while putting twice that amount into bond funds, according to the Investment Company Institute. But in January, investors started pouring money back into US stock funds—some $19 billion, their biggest such contribution in more than six years, according to ICI data. Since then, it’s tapered off a bit, though flows into foreign equity mutual funds have remained strong.

Meanwhile, retail brokerage firms like Fidelity, Schwab, and TD Ameritrade reported substantial increases in trading volume over 2012. Anecdotal evidence of a sentiment shift is also plentiful. This is from USA Today:

“Efren Hernandez, 49, a government worker from Los Angeles, got back in the stock market this month after selling most of his stocks in 2007 and 2008....”

“[Joanne] Mechling, 47, a married market researcher with no kids from Portland, Ore., admits that the fear of missing out on gains has given her a new sense of urgency to get invested. With the market near a new high, ‘it's definitely safe to invest now,’ she says....”

Investors appear to have gotten back into stocks again for three reasons: equity markets’ huge rallies to all-time highs; the decline in volatility, as measured by the VIX, over the past year; and the resolution of that great non-issue, the fiscal cliff, which created a noisy but ultimately meaningless brouhaha in the financial media late in 2012.

As The New York Times reported: “Jim Cole, a 52-year-old employee at the Bank of the West in San Francisco, had most of the money in his individual retirement account in cash at the end of 2012 as he awaited a bad outcome to the fiscal negotiations in Washington. Since Congress reached its agreement, he has put almost all of that money to work in stocks.”

“'There doesn’t seem to be this swirl of impending doom hanging over the US economy or the world economy....,’” Cole told The Times.

I don’t want to throw cold water on these good people, who are doing their best for themselves and their families. But really, this is exactly the wrong way to invest.

Investors who dump stocks amid fear and turmoil and then jump back in when their fellow investors are showing signs of complacency—well, what can you say?

NEXT: Psychology Is Not Investors’ Best Friend

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