The DOW is at 14,000 and the S&P is over 1,500 — I am sure you have seen this on the news.
Sounds wonderful, doesn’t it? Investors are happy again, the government has fixed all problems, the housing market problems are resolved, and the corporation of America is no longer lying about that magical penny. The Banks of the world have gotten rid of their toxic assets and all of Europe is now solvent again!
But, before you upgrade from regular to latte, or change your choice of scotch
from a 12 to a 30-year-old, ask yourself this question: If it is all this rosy, then why is the US Federal Reserve printing money it’s going out of style? What will happen when the Bond bubble bursts? Way are the banks still hiding all those foreclosed homes under other assets on their balance sheet?
“Unless you can watch your stock holdings decline by 50%
without becoming panic-stricken, you should not be in the stock market.” Warren Buffet
I am confident in my analysis that the stock market is
more prone to go down than up. The one silver lining is that investors always
keep piling on at the wrong moment and in doing so, they may keep the markets inflated for a while before it crashes (I prefer the word “corrects”) again. As more
and more people see and hear how well the markets are doing, they may
think, “I don’t want to miss out so I am going to put all my money that I had
sitting on the sidelines since 2008 in the market now!”
In my humble opinion, now is not the time to go all in: No one makes money at the top of a market — unless you are shorting the market. This is the time to take a bit off the table and wait for when investors are unhappy again. The good news for those very smart people who did
invest when things were really bad is that your patience is paying off: Over the
past 5 years, all those reinvested dividends plus some of the gains have put you
in, what I call, a sweet spot.
A sweet spot in the market is where you have taken out your original (principal)
investment and all you have in the market is your gains and your reinvested dividends.
Thus, if the market continues to go up, (a long Bull Run) your gains and reinvented dividends are still increasing in value, however if the market corrects (we go in to a Bear market), you can do what Warren Buffett and other smart investors do … Buy! Picking up great bargains.
Like my wife or any good shopper who suddenly sees that perfect dress that she as always wanted marked down to 60% off, it makes me very happy to buy stocks on sale. With all this said, if you found a perfect stock and you plan to be hold these dividend paying stock(s) long term–15 to 20-plus years–then buy some, that is invest maybe up to 50% so if the market proves me wrong and continues to gain then you are enjoying the ride up and if I am right and as the market tanks, then you can go bargain hunting.
I will close this blog with an appropriate quote from Warren Buffet, perhaps the world’s most successful investor of all time; “Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.”