2015 is starting out to a rocky start with the market down several days last week. It is tempting to sell out and wait for the market to fall down to its lows for the year before reentring the markets, but that would be a mistake. Even though stocks are at record highs, there is no reason they couldn’t continue higher for another year. Just because price-to-earnings ratios are high compared to historical averages doesn’t mean that prices need to fall. Earnings could also increase to bring the ratio down. Stocks have been climbing as they have been because investors see good economic opportunities with companies “lean and mean” and positioned for growth.
Does that mean that stocks won’t fall? Certainly not. After stocks have been on a run like they have for the last few years, they eventually outrun their fair value and fall back down to earth. We could easily see a slide to ten or twenty percent. There does not appear to be a significant event like the housing bubble building like it was in 2007 and 2008 (it was really obvious if you were paying attention). Still, there could be something lurking. Maybe student loan debt will collapse. Maybe falling oil prices will affect the economy negatively. Maybe increased terrorist attacks or actions of bad actors in the world will have an effect on the markets and we’ll see another 40% drop in prices. These things are unpredictable.
And that’s just the thing – it’s totally unpredictable. In such a scenario, the best you can do is look at the long-term history of how the markets behave and act accordingly. The things we know are:
1. Markets tend to keep going up long after many people think they are overpriced. You will miss out on a lot of appreciation if you always jump to the sideline the first time an analyst calls a market top on CNBC.
2. Over periods of five years or less, the direction of stocks is very unpredictable. There is really no reliable way to predict where the market will be next year if you put money in today.
3. The natural trend of the market is higher, because of inflation, population growth, and the advancement of technology that allows greater productivity. Over five-year periods, the market is almost always higher. Over ten-year periods, it is a near certainty.
4. If you invest regularly, as opposed to dumping in all of your money in at once and then sitting on your hands, you reduce your risk of losing money over five-year periods to almost nil. This is because there are normally some bad years in a five-year stretch during which you’ll buy more shares cheap and because the market is almost always up after a five-year period. Even if it ends where it started during the period, because you’ll have bought shares during the slump, you’ll be ahead of where you started.
So the way to invest in 2015 is the same as the way to invest during any other time period. You accept that you don’t know what the market will do and you take actions based on how you know the market tends to behave. If you have money that you will absolutely need within five years, you pull it out of stocks and put it somewhere safe. If you are nearing the time that you’ll need the cash, you diversify into different types of investments such as stocks, bonds, and real estate, and also put money in different sectors of the market and different parts of the world to reduce the volatility you’ll see with your portfolio value. You also try to set yourself up to have the money you need generated by more reliable interest, rents, and dividend payments rather than unpredictable capital gains.
If you have years and year until you’ll need the money, you keep investing and building up your portfolio. You put more money in when the stock market takes a dip. You put money into companies that you think have a lot of room to grow, then trim back positions as they become too large and continually diversify out into more stocks and mutual funds as you age and need to worry more about preservation of capital.
So really, the way to invest in 2015 is no different from the way to invest in about any year. Invest based upon when you’ll need to use money from the portfolio and your personal tolerance for risk.
Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.