The Stock Market makes a Comeback
Back in 2010, I bet Len Penzo and Financial Samurai each dinner the Dow Jones Industrial Average would finish the year above 13,000. It was a very aggressive prediction on my part and it cost me a couple of dinners. This week, the Dow finally crossed the magical 13K mark and is holding steady. More impressive, the S&P 500 closed above 1,400 for the first time since 2008 and the NASDAQ composite closed above 3,000 for the first time since 2000.
What does this all of this mean for investors?
Happy Days are Here Again
For millions of people who remained invested during the 2008 crash, this means our investments are finally back near where they should be. Sure, we have lost four years, but at least the value has returned to our portfolios. In my case, I kept investing the entire time, so I dollar-cost-averaged my way to a tidy little profit. It’s also a little vindication for having faith in the market while others were bailing out with huge losses. It was hard for me to even watch the news in those days.
There is Nowhere Else to Go
One important factor propping up the stock market is the lack of other investment opportunities. Deposit investments, such as CDs and Money Markets, often yield below the rate of inflation. Treasuries and other bonds are so low, they could devalue significantly when interest rates rise. Gold and other precious metals are very high by historical standards. Right now, stocks are one of the best bets for investors looking for returns. This has a lot of income investors chasing dividend stocks.
Is the Bubble about to Burst?
Although investors seem to be getting nervous at these higher levels, the market is in pretty good shape. Unlike the bubble markets before 2000 and 2008, stocks have reasonable values based on their earnings. The P/E ratio of the S&P composite is right now around 21%, compared to the historical average of around 15. So, it’s little higher than normal, but nowhere near the P/E bubble territory above 44 in 2000. If earnings keep growing at their current rate, the stock prices will be justified. If not, you can count on a correction. But, there is no bubble waiting to pop.
The Bottom Line
The bottom line is that you need a plan and some discipline to invest in the stock market. If you can’t hold tight when your portfolio drops 20% you should probably leave your money safely in the bank.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
George Soros – Billionaire Investor
Recommended Reading
Online Investing AI Blog – Are Good Investors Just Lucky?
101 Centavos – Investing in Farmland
Krant Cents – The 3 I’s of Success
This post was featured on the Carnival of Personal Finance over at Nerd Wallet. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the best place on the web to get your financial advice.
Thanks for the links, I really appreciate it.
Any time. I enjoyed reading your post.
Do you have any open bets going this year?
Using my new dumb options methodology, I’m guessing we’ll see a flat market through the end of the year, although gas prices might weigh on consumer confidence and stock prices. I don’t have enough confidence to make a huge bet either way, so I’ll just keep buying (ha!).
No bets this year Paul. Sam offered me double-or-nothing at the end of 2011, but I took a pass. Even though it finished strong, the market didn’t have the momentum I was looking for.
I have a feeling the market will be digesting these gains for a while. I am hoping for the usual summer doldrums and then a strong finish to the year. Right now, I’m just thankful it’s back.
Glad you stuck with it and have recovered.
Are you open to alternative views? Check out the book “Risk Less and Prosper: Your Guide to Safer Investing”. (I have no financial stake in it, just interested.) Coincidentally, the subject of my post today! 🙂
Thanks Bret.
Thanks for stopping by Kurt.
Yes, I am definitely open to alternative views. I look to learn from others at every opportunity. I especially pay close attention to those who are experienced and successful. A couple of smart people took me under their wing when I started investing and it helped me tremendously.
I read your article and I enjoyed it. The problem with investing in TIPS and I Bonds is that they yield less than the rate of inflation. For example, a 9 Year TIPS is yielding 2%, while the posted rate of inflation is 2.9%. That’s what I call a guaranteed money loser. It’s fine for preserving capital, but it’s not a great long-term solution for building wealth, which is my primary investment goal.
I will stick with my mutual funds for now. They may go up and down, but over the long term, they easily outpace inflation and grow my portfolio. I haven’t done nearly as well with my individual stock picks, but I’m getting much better at it.
Phew. Long way to go but this is a start.
The global economy is still fragile even if it appears to be improving. I am wary of any blackswan events this summer as it could wreck the party. On the other hand, dolalr cost averaging really helps take the eye off the ball since in the end, growth will resume and markets will recover.
I believe there are a lot of potential events to spoil the rally, including political failure and high gas prices. Plus, we are coming up on the worst historical season for stocks. But, as long as the earnings are strong, the stock prices will come back, sooner or later. I’m a patient man.
HAH! That is awesome.
Thanks for the link, Bret, and sorry for not stopping by earlier (the trackback was hidden in the spam section – I think I’ve fixed it now). I’m with you on being semi-bullish in an election year. It’s early to mid 2013 that’s got me a little worried.
No problem Andrew. I’m glad you stopped by to comment.
I kind of agree with you about 2013. Either the economy is going to continue to improve and 2013 will be OK. Or, the deficit, housing or cost of energy will sink the economy. The market has already risen quite a bit, but earnings are solid. I sure wish I had a crystal ball to know the future.
Im lookin’ forward to c and read ur next post. Thank you for putting your effort in publishing this site. Cheers
You are very welcome Liza.
“Truth is, there are much better ways to invest your money while not having to assume the added risk.”
Thanks for stopping by Erica.
What is a much better way to invest without the added risk? I am definitely interested and I’m sure my readers are as well. Do tell.