By Andrew Nyquist
If you haven’t had a conversation with yourself about stock market expectations, then now is a good time. The market has been clicking on all cylinders and many stocks have soared higher. Current expectations for the stock market have investors asking “how high?” And further, many are excited by the action and want to know if now is still a good time to put money into the market? They see the market going higher and want a taste of the action.
I can’t blame them for “feeling” that way, but I often try to caution investors when I see this scenario unfolding. I think it boils down to one simple question: Why do we as investors buy stocks and/or other investments?
Well, most investors buy stocks on the expectation that they will bring return on their investment (i.e. they will go higher). And this usually requires getting in for a good price (or feeling like you received a deal). But this is easy to lose sight of and often times gets distorted. As the good news start to flow, investors expectations rise. And as the stock market moves higher, investors sentiment goes up and expectations increase even further. It is at this juncture that markets become a bit tricky, for they are no longer pricing in for any bad news. And furthermore, just meeting expectations isn’t good enough. Unfortunately, it is during this euphoria that many amateur investors pony up their hard earned cash.
Now, I understand that each stock/security is unique and needs to be judged on its own merits, but by and large, many investors don’t take the time to truly consider their time horizon when investing. It goes out the window with the desire to be a part of the money making action. And as expectations push higher, investors are caught looking up… and prices come down. For this reason, it is important to have an investment plan or strategy crafted (even for active investors like myself). And this is especially important at elevated prices. The market (i.e. S&P 500) is up 20-25% over the past four months, so putting new capital to work now may be questionable for long term investors (unless on a 401K plan that is constantly dollar cost averaging). And if you are an active investor (i.e. trading), then be sure to employ sell stops to limit losses should the market turn against you.
It is important to remember the strategy is to buy low and sell high. Whether a long or short term investor, patience is always a virtue. Wait for opportunities to arise, and put money to work when no one else “wants” to. This usually means that prices are lower. Again, buy low, sell high. We don’t want to buy high and hope. Or further, buy high and later wonder why our investments aren’t performing.
———————————————————
Your comments and emails are welcome. Readers can contact me directly at andrew@seeitmarket.com or follow me on Twitter on @andrewnyquist or @seeitmarket. For current news and updates, be sure to “Like” See It Market on Facebook. Thank you.
Position in S&P 500 related short index fund SH.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.
