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.