As I speak to investors, whether individually or at talks that I give, the number one question I get is how much higher can the stock market go? My answer to them is quite simple, and that is that I don’t know. Not only do I not know, but neither does anyone else. You have plenty of people who speculate about the direction of the market but in reality, they don’t know either. I’ve always told investors that it’s a fool’s game to try to predict the market. After all, at any time we could have a downturn or a correction. However, if that happened the real issue is how long would the correction last. Would it be one of these situations where the market sells off and two weeks later reaches an all-time high? Or would it be a correction that lasts a few years? Once again, many people speculate and make predictions, but no one knows for sure. Although it may be fun to try to predict the direction of the market, the reality of the situation is that isn’t how you should be investing your money.
For as long as I’ve been in the investment world I have believed that investors should not invest based upon where they think the market is going but rather, invest based upon their own individual situation and what they are trying to achieve with their money. That is why I’ve always told investors that when it comes to investing, the focus is not on where the market is but rather what their individual goals and objectives are. If someone was saving for retirement and retirement is 20 or 30 years down the road, this is a wonderful time to invest. On the other hand, if you had money to invest and you needed that money in six months, I believe investing in the market would be a mistake. Even if I believe that the market will be higher six months from now, I would still tell an investor with a six-month time frame to avoid the market. As investors, we cannot predict the market, particularly over the short run; however, we do know our goals and objectives and that is where our focus should be.
When investors try to time the market or predict where the market is going, particularly over the short run, they are no longer investors but rather they are gamblers and speculators. There’s nothing wrong with speculating and gambling with your money; however, I wouldn’t want to do it with my retirement money. You should only speculate and gamble with money you can afford to lose. Therefore, if someone had a six-month time horizon and they wanted to speculate on the market, that’s fine as long as they accept and understand the risk that they are taking.
There are a number of reasons why the market has exploded over the last year. These include the substantial reduction in regulations on businesses, the increase in consumer confidence in the United States, the anticipation and now the reality of tax reform, and the fact that corporations are making money. Whether these factors continue to drive the market is anyone’s guess. As investors, we can drive ourselves crazy trying to predict what factor or factors will move the market. I believe as opposed to wasting your time trying to predict markets, a better use of your time is to redefine why you are investing money. You will be a much more successful investor if you are focused on your individual goals and objectives and use that as your guide as to how you should invest money.
It would be nice if you could buy when the market is at its ultimate low and sell when it’s at its high. That would be nice; however, no one has been able to do that consistently. Remember, when you time the market you have to be right twice: once when you buy and once when you sell. Since you can’t time the market, a much better strategy and one where you can be more successful, is to make decisions not based upon where the market is but rather, what your goals and objectives are. If you’re a long-term investor you ought to be consistently investing in the market and have the discipline to stay in it despite the rollercoaster ride. On the other hand, if your goals are short term, no matter how good the market is, it’s not for you.
I know when you invest based upon your goals and objectives you can miss out on some nice runs in the market. However, the reverse is also true when you do invest based upon your goals and objectives; you substantially reduce the risk that your money won’t be there for you when you need it.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.