Since mid-March, the S&P 500 is up almost 58% and the Dow Jones Industrial Average is up almost as much. If you opened your retirement savings at the end of the first quarter this year and looked at the numbers with a cringe, it’s likely that if you looked at the numbers right now, you’d feel significantly better.
Why the big rebound? To put it simply, the greater world finally realized that the only thing we had to fear was fear itself. The economy didn’t collapse. Instead, we just find ourselves in the middle of – and perhaps moving towards the later stages of – a rather strong recession.
Naturally, as the economy begins to slowly come out of a recession, the stock market goes gangbusters. Companies are beginning to reawaken and slowly increase production, a radically different picture than the massive cost cutting of the past year. Unemployment is somewhat stable – it might go up a little more, but it’s no longer on the rocket ship that it once was.
In short, we’re getting through this and we see sunlight at the end of the tunnel.
What does this mean for you and me, as small individual investors? Does this mean we should convert all of our investments into stocks and ride the rocket ship?
To put it simply, no, it doesn’t.
Hedging your long-term investments on what you think the stock market (or any investment market) is going to do in the short term is called market timing, and it’s never a good idea.
My philosophy is simple, and it’s one that was taught to me by many, many wise investment writers and investment books: unless you’re a day trader or spend a significant amount of time daily studying the stock market, you’re a long term investor, and long term investors have nothing to gain from trying to time the market.
Simply put, the vagaries and complexities and huge sums dealt with on the stock market each and every day, with so much insider information floating around and individuals playing all kinds of manipulative gains, the total uncertainty of day-to-day world events (if you recall, for example, 9/11 was wholly unexpected), makes it a very unsafe place for the typical person trying to save for retirement or for another long term goal. Instead, their reward is to simply look at the stock market as a long term place to put their money for a long term investment with a payoff date more than ten years down the road.
It’s all about your goals and your risk tolerance. It has nothing to do with what’s going on today, tomorrow, or next week.
Don’t let yourself be swayed by huge positive returns in the short term – or huge negative returns in the short term, either. Just stay the course with what you’re doing. If you find that the stress of such swings makes you nervous, redirect your future contributions to something with lower risk, like bonds.
Otherwise, just let things ride. Tomorrow might bring a huge unexpected event that we can’t see coming – or that some CEO is keeping under wraps for now. Given time, the stock market will correct itself from that, but over the short term, it’s basically little more than gambling unless you have the time and resources to devote yourself to truly careful study – or you’re investing with a small sliver of your portfolio that’s there solely to play around with.