People have been asking me this question since 1982 when I passed my test to become a “registered representative” with a regional stock brokerage firm, a member of the New York Stock Exchange. Though my firm had an exceptional training program, I really didn’t know very much as a 25-year-old rookie stockbroker.
Still, the Dow Jones Average was about 770 at that time, and as of this writing it is around 21,000! If I had consistently recommended to buy diversified portfolios of mutual funds and always convinced clients to “hold on” and to “add more” when the market was in decline, think of the wealth that would have been created!
I don’t have to use much imagination because I still work with a number of clients from the early 1980s that did just that, and every workday I get to realize some satisfaction as I observe their results.
So, what about today? It’s 35 years later. Stock prices are at or near an all-time high. What about the market now? Is it too high? What about all the news, the turmoil in the world, and the media warnings to get into cash?
Recently some very smart prospective clients have told me “they think” that the market is overvalued. They cite all the reasons in the previous paragraph, and even more. “It’s all gone up too much,” they say. There is too much uncertainty. And what do I think about it?
Consider this: The amount of trading volume has exploded since my early days and keeps growing. Depending on the source and the markets observed, there are realistically over one billion transactions per day valued at over $100 billion. Some days much more.
So, who does this buying and selling? It’s professionals with pedigreed résumés and the best research and information. They “vote” on the value of individual stocks every day, all day, buying and selling based on this information. Does it seem reasonable that this causes stock prices to be fair, based on the known information, just about every day?
For more background on this concept, look up “the Efficient Market Hypothesis” by the Nobel Prize-winning professor Dr. Eugene Fama.
Or, take a practical look at historical events and compare to market movements. Would you have invested in stocks in January 1942 with the world gone crazy into World War II? In the following years, stock prices rose dramatically.
Just about every year since 1942 there has been a good reason to “wait it out in cash.” Compare past headlines to results and it often makes these old headlines seem silly.
The bottom line is this: If your money is going to be needed in the next few years, or if your money is “hot” money just testing the markets, cash or short bonds are a good idea.
But based on the evidence, long-term investors—and I mean 20-year time frames here—are rewarded with attractive gains by making commitments to “ownership” investing to meet future financial goals for education, retirement, gifting to charities and family, and for important personal goals.
Check out my “History of the Market” exercise in The Extreme Retirement Planning Workbook available for sale on this website.