2013 was a ridiculously good year for the stock market.
The S&P 500 had its largest gain 16 years and returned 30% to investors. The Dow had its biggest gain in 18 years.
But many investors still reeling from the financial crisis, chose to stay on the sidelines and missed out on one of the biggest years for the stock market.
In fact, a recent Gallup survey showed that only 52% of Americans are personally, or jointly with a spouse, invested in the stock market. This is the lowest level since 2008.
Understandably, those folks are probably kicking themselves now, but are worried that a correction could be coming this year, and are antsy about stepping in at the top.
“In practice you have to be empathetic,” Seth Masters, CIO for Bernstein Global Wealth Management, told Business Insider in a phone interview. “Because you know saying I told you so doesn’t help someone at all.”
So what do you do if you missed out on last year’s gains?
- First, don’t try and time the market. Don’t make rash investment decisions because you missed out on a great rally.
- Second, remember to base your asset allocation based on your financial goals, time horizon, and risk tolerance.
- Third, accept that if you want to grow your wealth it will involve some amount of stock exposure and that there is no risk-free way to load up on stocks.
Investors make two commons mistakes after such a rally, Fran Kinniry, principal at Vanguard Investment Strategy Group, told Business Insider. They either extrapolate from last year’s returns and take on too much risk. Or, they’ll look at the run up not just last year, but the last five years and decide to wait till the market pulls back.
Instead Kinniry said, this should serve as a “great learning opportunity” for investors to “really not engage in market timing in the first place.” Instead he thinks investors should “develop an investment plan that meets their goals, objectives, and risk tolerance, and rebalance continuously to that because the only thing you can do from missing out on that return is to learn from it.”
Masters thinks along the same vein pointing out that investments, by definition, are about meeting some future goal, and that people should invest depending on their future goal.
That being said, there will always be risk in capital markets, but the only way to meet one’s investment objective is “by growing your wealth by having exposure to return seeking assets like stocks that are risky,” Masters said. “That was true a year ago, it’s true today, and it’s going its going to be true five years from now.”
Of course that doesn’t mean investors should just pile into stocks haphazardly.
For instance, there were some who thought they could gain equity exposure through high dividend yield stocks, which they thought had the added benefit of being safe. Instead this set them on the course of the “safety bubble,” according to Masters. People overpaid for these stocks because of their perceived safety, while “what they were really doing was risky simply because the price had gotten so expensive.”
The thing to note as the safety bubble deflates is that investors “haven’t lost gobs and gobs of money,” instead, “they have suffered an opportunity cost.” This is because the one virtue of safe assets is that they are relatively less volatile. So, when they do go down, they don’t go down a lot, so the economic and psychological damage from the unwinding of the safety bubble is quite modest.
But one thing is certain, if people do want to get back into stocks they should “recognise that they are taking a risk and don’t imagine that there is a safe way of gaining exposure to stocks, there isn’t.
“There will be bad years as well for stocks, but by definition if you basically sit on the sidelines all the time you will for sure only get returns from cash which we know will not even keep up with inflation,” Masters said.
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