Time to Increase Exposure to Stocks?

Be very careful about blanket advice.

As I make my occasional trips to the men’s comfort station, I pass through our waiting room. Thanks to the generosity of my colleague David and his support for the publishing industry, I get to regularly see what the popular press is saying.

Imagine my shock when I saw the latest MacLean’s cover, with a headline screaming, “The stock market - BUY!”

My first thought was that this was totally irresponsible. When I grabbed the magazine to accompany me on my intended journey, my first impression was reinforced, as each sub-heading pulled harder at the dangling strings of people’s greed (even though the article confused buy and sell signals into an almost unrestrained “buy” message). 

My real concern, and why I find such sensational, bombastic “journalism” so scary, is that nowhere in the article are there any guidelines to help a person temper the message to their own situation. There is no acknowledgement that investing a substantial amount in shares might be appropriate for some people, but totally inappropriate for others. Instead, it was just an appeal to greed, perhaps compelling enough to encourage some people to do things they ought not to do.

The article itself, for those patient enough to read to the very end, had some balance in its view of the stock markets, and whether or not we are at “...the start of a once-in-a-generation boom.”  

We may very well be. But the market growth they suggest would be over a ten or twenty-year span. That’s wonderful, and that’s why we buy shares of companies – to participate in long-term growth, and to grow our capital at a rate that beats inflation and taxes.  Ownership of growing assets or businesses is pretty much the only way to do that.  So what’s my issue?

Let’s assume MacLean’s is correct, and the next decade provides massive returns on the stock market. The tragic news is that, even if that comes to pass (and I personally believe it will), many investors will not fully participate. Many will be disappointed, either with themselves, their advisors, or the “system.”  Some will lose capital, even while others double their money over ten years.

Why?

Because they follow these crazy headlines that tell them they have to invest in stocks, or they will miss out on something big, like Nortel going from $100 per share to the expected $150, in 2000. They will, as a result, invest more than they should, or invest money they’ll need in the short term. 

And they will invest without a proper understanding that the price of shares goes down as well as up, sometimes quickly, sometimes almost violently. This happens regularly, and it will happen repeatedly through this next bull market, just like every other bull market before it. The rise is never straight up.

People who are unprepared for the bumps will get bucked off. They will panic at the wrong time, read a new headline in MacLean’s or somewhere else that says (always after the market had dropped 20% or more and then actually represents good value) that the next great bear market is upon us, as these headlines said in late 2008 and 2009, when there really was an historic buying opportunity.  

As my wife says to me quite often, “Hold on, it’s going to be a rough ride.” She could be talking about the stock market (though I always hope she is not).

Before investing in stocks, ask yourself, “What is this money for?” and “When will it be needed?” (With thanks to Nick Murray.)

If the answer is less than five years, then it really doesn’t belong in the market.  If it is to fund your retirement over 10, 20 or 30 years, then yes, a portion of it should be used to buy good quality, growing businesses, which will pay you increasing dividends and reward you with capital growth – in the long term. 

But, please, always invest amounts that are appropriate for you, and then re-balance back to your target regularly. Do not increase your stock allocation because some headline said it was the right time. Do it because it’s the right thing for you and your situation, long term.

David Christianson, BA, CFP, R.F.P., TEP, is a financial planner in Winnipeg and author of the book Managing the Bull, a No-Nonsense Guide to Personal Finance.