Brett Arends on ways of coping with the large gains in the US stock market my highlights in red All quotes in italics
The Surging Stock Market: Too Late to Buy?
How to Think About Investing When Prices Are This High
Main Street is starting to stampede. As the stock market surges to new highs, ordinary investors who missed a lot of the rise have been rushing to jump on board.....
It's easy to see why. Most people find it very hard to resist a crowd. (Economists call this "herd behavior.") And with the Dow Jones Industrial Average nearing 17000 (compared with less than 7000 in 2009) it can seem like everybody is making easy money except you.
Some of the strategies he mentions with those sitting with cash on the sidelines...but they apply to all investors in my view:
"Be fearful when others are greedy, and greedy when others are fearful," advises Warren Buffett, the most successful investor in history. His meaning: The market is never so dangerous as when everyone else is optimistic and share prices have already risen a long way. Indeed, historically, you could have made money by investing in stocks when the public was selling, and selling only when the public was buying.
At current levels U.S. stocks in particular are very expensive by long-term measures, such as those which compare stock prices to dividends, the value of company assets or average earnings from the past 10 years. Many on Wall Street say a correction is long overdue. The Federal Reserve is winding down the easy-money policy which has helped drive up stock prices....
. Keep your balance
It is a beginner's mistake to put too much money into the stocks or assets that have already risen the most. During a boom, that typically includes the most volatile assets, such as small-company stocks and the stocks of companies hoping for the most growth. Those are the assets most vulnerable to a pullback.
Investors can reduce the dangers by committing in advance to a balanced portfolio that includes less-volatile assets, such as government bonds, which offset high-volatility stocks....
Look for value
During every boom there are always some who lose sight of what a stock really is. They talk about "beta," "growth stories" and "blue sky valuations," forgetting that a stock is simply a claim on a company's future cash flows.
The less you pay for those cash flows, the better the deal. The more you pay, the worse the deal. Decades of research shows that those who invest by this principle earn superior returns with lower risk. Stocks that are cheap in relation to their net assets, per-share earnings and dividends have proved the best investments over time....
Go global
U.S. stocks have risen much further lately than those of other countries, including many in Europe and Asia. At current levels U.S. investments may entail higher risk, and possibly lower long-term returns.
Focusing your investments too much on your home country's market is a common beginner's mistake. Professional money managers often go along with this in order to get along. But it has no justification in theory or practice.
You can lower your risk by investing in global stock funds rather than in the U.S., giving yourself adequate exposure to developed overseas markets such as Japan, Germany and the U.K. and so-called emerging markets such as Brazil and those in Southeast Asia.
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