I usually shift to more conservative investments when the individual or "retail investor" starts to jump into the stock market with more money than he or she can afford to lose. Unfortunately, after being punched by a market crash during the Great Recession, most of us fall into that category. We can't afford to lose any money in our retirement savings.
According to a recent Yahoo Finance Breakout piece, clues for where the stock market might head after reaching all-time highs can be found in the patterns of 2007 and 1980.
Being burned by the stock market crash
In 2007, the stock market was roaring along. I know I was excited by how much money I was making in individual stocks. Then the sell off started due to the financial crisis. The market's value was cut in half. I know colleagues who cashed out their 401(k) accounts at the bottom because they couldn't afford to see what happened next. Those of us who held tight got back to even in a matter of four or five years. I'm not ready to watch my retirement balance shrink by as much as 50 percent so I'm not leaving it all in stocks.
Riding the rally that shouldn't be
On the other hand, I do keep some money in stocks because I know that there is no predicting the future. One of the main reasons I have been skeptical about the stock market is because so many baby boomers should be pulling their money out of stocks in order to retire. However, I didn't expect many baby boomers would leave their money in higher-risk positions longer. Many baby boomers made money in the bull market that started in 1982 when I was in elementary school. Perhaps they are more willing to risk their money in stocks in their retirement years.
Buying over the long term
When it comes to my retirement accounts, I don't really care what kind of a market we are in. I don't feel I have any other choice but to invest each month. Since I'll be "dollar-cost averaging" into the market over the course of the next 20 or 30 years, the ups and downs of the market don't worry me. However, with my investment account, I'd like to be able to "ride the bull market." When the stock market is down, it becomes a lot trickier to pick investments that will profit in the short term.
Even though the stocks have gone up significant as part of this cyclical bull market, I think stocks are still a bargain. If we truly entered a secular bull market, or one that lasted for more than a decade, I think we would be pleased by the prices of stocks today. Maybe we won't see the stock market rally like it did in the 1980s, but I know I'll be better off if I just buy and hold.
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