Should you buy stocks now?
If you are like many investors, you may have a large chunk of your brokerage account or IRAs in money market or short term treasury, and your 401(k) in a Stable Value Fund. The DJIA and S&P500 have been reaching new highs in the past few weeks, and, naturally, investors are wondering: is it time to get back into the market, is it time to buy stocks now or stock mutual funds?
A recent Dalbar study has shown that the average investor in US stocks and stock mutual funds earned an average return of 4.25% per year over the past 20 years, while the S&P500 stock index generated an average 8.21% return over the same period. In other words the average equity investor underperforms the financial markets by almost 4%. This large difference is mostly due to people trying unsuccessfully to time the market.
A more sensible approach is to consider the intended use of the money sitting in money market. Is it for a short term purpose, such as next September’s college tuition or buying a car? If so, the funds should probably stay in money market. Is it for a long term goal, such as retirement or saving to buy a house on the beach in 10 years? Then, buying stocks may be something to consider.
As an investor, you should have a long term plan that allocates your money to goals and to investments. Whether to buy stocks now or not to buy stocks now should not depend upon how well the market is doing. If you need a plan, or you need to update one, speak with your Financial Planner. If you need a planner, contact us or the Financial Planning Association of Massachusetts.