Is the Stock Market Casting a Spell on Investors?

After the financial markets posted another strong performance during the first half of this year, the word “magic” keeps coming to mind! And it’s not just because the word offers an apt description of the pretty wizardly stock market returns lately.

bull-markets-604cs030413My current interest in sorcery also comes from observing a noticeable shift in investor behavior. Just a few years ago, some investors were very apprehensive about stocks, and very reticent to take on very much risk in their investment plans. But in recent months, some of these folks seem to have come under a magic spell and have begun to appreciate the potential rewards (and the risks?) of equity investing.

It’s certainly understandable how the stock market’s performance may have brewed a mystical tonic to bring investors back to stocks. During the first half of 2014, the Standard & Poors 500 Index (the “S&P 500”), a well known and broad measure of the US stock market, gained 7.14% through June 30, 2014.

Hot Equity Market!
These returns came after two consecutive excellent years in 2013 and 2012 when that same index posted increases of 32.39% and 16%, respectively. Since the bear market bottom on March 9, 2009, the S&P 500 has gained a whopping 221.17% through June 30, 2014. The impressive results seem to be the investment equivalent of pulling a rabbit out of a hat!

Earlier this year, I began to hear conservative investors expressing a desire to increase their equity investments. My personal observation of this apparent growing appetite for stocks, combined with other anecdotal evidence of such interest, raises important questions for all investors.

magicoDoes the more optimistic tone in business and among investors makes this a good time to seek out potentially greater investment rewards? Or, are investors setting themselves up to be potentially disappointed if the equity markets shift unexpectedly to a downward trend?

Of course, it is great news that there is more optimism in the air! A more positive economic outlook, an improving job market, and healthy stock returns reflect an environment that some thought just a few years ago could have only come about through economic sleight of hand!

And although there remain some concerns about the strength of the current economic recovery, the current financial climate is certainly far more encouraging than it has been for several years. But does that mean you should increase your exposure to equity investments?

That’s a question which wizards or financial advisors should not answer hastily. Any investment shift, especially a significant change, provides both risks and opportunities that should be evaluated based primarily upon an investor’s financial goals and circumstances, as well as that individual’s risk tolerance. Conversely, the decision should NOT be based on which investments have offered the best returns most recently.

Chasing Attractive Market Returns?
Unfortunately, investors, to their own detriment, sometimes pursue investments that have fared well in the short term, but which might not be priced to perform so well in the future. Some financial journalists have recently suggested that investors who want to reconsider their investment strategies or asset allocation might be acting irrationally, or adding risk to their portfolios at exactly the wrong time.

I don’t completely agree with that perspective since an investor might have valid reasons for re-considering their financial goals and/or their personal circumstances might have changed. Also, stocks might not be so outrageously priced relative to historical valuation models that would suggest a plunge is necessarily imminent (though a wizard would need a crystal ball to know with certainty).

Should You Change Your Investment Path?
iStock_000011359435XSmall appian bottomStill, prudence may likely be the order of the day. Investors should establish and stick with a disciplined asset allocation strategy and look for opportunities to “rebalance” back to your model. That discipline might suggest that selling some stock might be timely if your model is out of balance.

Although we all might wish for a magic wand to make profitable investment decisions, not even the best wizards can time the markets or guarantee investment outcomes. Instead, investors should consider using time-tested investment principles and potions in managing their portfolios. As always, if you have any financial or investment related questions, please send me an email message at bill.pollak@lpl.com or call at (925) 301-4086

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing.

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