Rarely, if ever, are you going to get an “all clear” sign from the markets that tells you it’s time to invest.
Being cautious and protecting yourself from big market drops is very important. In fact, it’s more important for long-term investors to beat the market’s return in a downtrend than in an uptrend.
Yet there is such a thing as being too cautious – to the point where you have too little to no exposure to investments that would offer a reasonable return.
A recent Wall Street Journal poll backs up that very idea: It reveals that by a large margin, one of the biggest mistakes investors make is being too cautious with their investments. Research also suggests that excessive market fear is common, and in some cases irrational.
Market commentator Jeff Miller puts it simply: The biggest mistake he sees people making is waiting.
Some investors may be waiting to see if the unemployment rate starts to improve, or to see what happens with the fiscal cliff. Others may be waiting until after the election to get more aggressive.
Waiting, however, still may not bring clarity. There may simply be other political events potentialities and scary news headlines to take their place. Then what?
Miller forwards a few important ideas when it comes to risk-taking in the markets:
- It’s not necessary to be “all in” or “all out” with you investments. You can scale in to increase your risk exposure gradually, and scale out or adjust your holdings ahead of potential dangers.
- The ratio of risk/reward is different for every investor. Yet too many choose a risk ratio of zero, he says. That is rarely the right answer.
- Warren Buffett’s advice is to be greedy when others are fearful and fearful when others are greedy. Reading news stories, blogs and paying attention to sentiment polls can help you or your adviser get a feel for investors’ ever-changing moods.
For the moment, there are some reasons to think that investors are still fearful and that stocks are not overbought.
That is surely not an all-clear sign. Yet it may be a reason to talk to an adviser and to possibly consider a more aggressive stance if you have little to no stock market exposure right now.
