Most people who invest in the stock market are optimists by nature – you have to be to tolerate the wild gyrations in prices.
The question you must asked yourself is “am I an optimist because I believe in the historically robust U.S. economy or am I an optimist because acknowledging some of the truly dreadful facts is about the stock market is too frightening?”
Either way, the expectation is that some how, some way, you will find profitable investments that will do better than stock market indexes.
Is that realistic in a stock market that has essentially been flat since the crash in 2000?
Of course, there have been peaks and valleys since March 2000 when the dot.com bubble burst and before the terrorist attacks of 2001.
However, the major indexes really haven’t moved up in any steady manner since the crash. Two major dips in 2002 and 2008 illustrate the volatility of the stock market since 2000.
What is a long-term investor to do when broad market gains are temporary at best?
Conventional wisdom says ride out the volatility (unless you are within five years of needing to cash out – at retirement for example.) Studies have shown that staying in the market is the best strategy for scoring the largest gains when the stock market does turn up in a sustained manner.
In other words, the best time to take advantage of an emerging bull market is long before it is obvious, which means staying invested rather than trying to time buying low and selling high (trading).
The question is when (and if) will a sustained bull market emerge. You can’t know that, but if you have confidence in the U.S. economy, you expect that another bull market will emerge at some point.
For investors with more than five years, this is a reasonable strategy. If you don’t have confidence in the U.S. economy, you probably are not an investor (although you may be a trader).
For those facing a shorter time period, the stock market is not the best place for most of your money. Think more about preserving what capital you have and less about scoring big returns.
