Investors Are Keeping Their Eyes on the Ball. . .But It's the Wrong Ball

There's a frenzy of stock buying going on now, because no one wants to be left out of the stock market recovery.

To some extent, this enthusiasm is warranted. The long-term data fully support investing in stocks. From 1926 through 2010, the average annualized return of the U.S. stock market has been almost 10%.

However, it's short-term data that's fueling the current rush into stocks. The rapid recovery of the stock market has put most "buy and hold" investors back in the black, granting them a full recovery from the market crash that began in 2008. So much for those who claimed that buy and hold was dead.

No Risk, No Reward


All that euphoria, however, is proof that investors have short memories for the risks associated with overexposure to stocks.

Investing in stocks is a double-edged sword. The profits can be worthwhile, but buying equities always involves uncertainty about returns and a risk of losses. Most investors view the risks as negatives, but they are actually positive forces: It's only by accepting the uncertainty and the risk that investors get compensated with higher returns.

The problem with most investors is they want the returns of stocks with the risk of the bonds. When stocks tank, as they did in 2008, those investors dumped their stocks and fled to safety. Now that the markets are in recovery mode, we're seeing the opposite trend. But investors who move in and out of stocks, trying to predict short-term trends, receive only a fraction of the returns reflected in long-term market data.

There have been four periods since 1926 when the stock market had two or more consecutive years of negative returns. If you aren't prepared to hold on during those periods, you should have no exposure to the stock market. I tell my clients not to have any stock market exposure if they will need 20% or more of their invested assets within five years.

Keep Your Eye on the Right Ball


Investors who are betting on a recovery are engaged in what I call "wrong ball investing." No one can predict the short-term direction of the markets. Market prices are determined by tomorrow's news, and none of the pundits confidently predicting the continuation of the stock market recovery have read that news yet.

Your investing decisions should not be based on a belief that the stock market will continue its upward trajectory in the near term. It might, or it might not. Instead, you should be determining your asset allocation -- the division of your portfolio between stocks and bonds -- and investing in a globally diversified portfolio of low-management-fee stock and bond index funds. I have a good asset allocation questionnaire on my website: smartestinvestmentbook.com.

By following this advice, you'll be able to withstand the inevitable short-term volatility in the stock market and enjoy the long-term historical returns stocks have delivered. That kind of investing is keeping your eye on the right ball.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum

87 Comments

Filter by:
Dereck

Major Fraud Alert


The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

Bank of America violated the 21st Century Act: Final Amendments to Regulation CC Section: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040726/attachment.pdf

seeking reimbursement of Credit, Loan, and Finance Balances as a "Bank Entity" and not a "Nonbank Consumer" as specified on Pages 85 and 86.

The person they sued through a LLC. Debt Collection Company and Law Firm was the "World Fortune Owner" who "Counterclaimed" and won.

Now all Contracts of any Corporations (Including Employment) under the "Controlling Interest" of any Investment Bank Worldwide are "Null and Void", and are also under the stipulated Rules and Regulations of an "Closely-held S Corporation rendering all Employed under Legal Actions against “Domination”, and also means that "No Corporation can hold Shares" officially making every Stock Exchange on the Planet a "Ponzi Scheme" by default.

Businesses owned by the States (Public Corporations) are being sold Stock Shares by Corporations also under the Federal Banking System in this Worldwide "Ponzi Scheme". The World Fortune Company Merrick Inc. Sweden is dissolving Millions and Billions of Dollars from "All Levels of Government"in the U.S. of Financing based upon Years of "negligent inaction" involving this case.

The Federal Government has already been forced to discontinue supplying the Financing States use to pay their debts, Persons in Government Offices may want to begin to take their jobs more seriously, these are different times from 10 Years ago and you will not be accepted civil servants here just because you say you are here to do the right thing.

May 29 2011 at 1:23 AM Report abuse rate up rate down Reply
evonie55

Here we go again. Didn't anyone who lost money not learn a damn thing?
All this is, once again is speculation to get idiots to part with their money.
I'm sure as hell happy I don't play that game.

February 16 2011 at 11:47 AM Report abuse rate up rate down Reply
ET

Focus on how many times the Stock Market crashed. Now build in Phi, as a spiral.
Plot the times of the crash and see how each dip fits so well and now that the screw has smaller and smaller round, how often they think they can get away with the same stupid trick! All fingers point to the crowns.

February 16 2011 at 6:59 AM Report abuse rate up rate down Reply
gondanger1071

Someone need to place a BULL's Eye and drop a NUKE at The Dated Brent Spot...
It seems the only oil trading post that is keeping oil price up while the rest of the oil trading posts are diving in response to fading Egypt turmoil, fading demand and increasing of oil supplies...

February 16 2011 at 4:59 AM Report abuse -1 rate up rate down Reply
gardeningatnite

Simple questions sometimes require complex answers. The truth is still the truth whether or not you consider it a "standard retort" or not. You just keep hoping for your Big Government "nanny state" and I'll just keep working as hard as possible to provide a great life for my family. Once your Marxist/Socialist utopia finally takes root here in America we can escape to a place where freedom and capitalism still exist. Perhaps emigrate to some other country that has learned the valuable lesson that America has taught to the world...the lesson that Marxism leads to poverty and free enterprise capitalism results in prosperity for those who are willing to work for it!...........WTF! You have me ROFL! Thank you so much! I needed a good laugh!

February 15 2011 at 8:28 PM Report abuse -2 rate up rate down Reply
3 replies to gardeningatnite's comment
lou4two

MUST READ!
OIL---you better be sitting down when you read this !


Here's an astonishing read. Important and verifiable information :


About 6 months ago, the writer was watching a news program on oil and one of the Forbes Bros. was the guest. The host said to Forbes, "I am going to ask you a direct question and I would like a direct answer; how much oil does the U.S. have in the ground?" Forbes did not miss a beat, he said, "more than all the Middle East put together." Please read below.




The U. S. Geological Service issued a report in April 2008 that only scientists and oil men knew was coming, but man was it big. It was a revised report (hadn't been updated since 1995) on how much oil was in this area of the western 2/3 of North Dakota, western South Dakota, and extreme eastern Montana ..... check THIS out:


The Bakken is the largest domestic oil discovery since Alaska 's Prudhoe Bay , and has the potential to eliminate all American dependence on foreign oil. The Energy Information Administration (EIA) estimates it at 503 billion barrels. Even if just 10% of the oil is recoverable... at $107 a barrel, we're looking at a resource base worth more than $5...3 trillion.




"When I first briefed legislators on this, you could practically see their jaws hit the floor. They had no idea.." says Terry Johnson, the Montana Legislature's financial analyst.






"This sizable find is now the highest-producing onshore oil field found in the past 56 years," reportsThe Pittsburgh Post Gazette. It's a formation known as the Williston Basin , but is more commonly referred to as the 'Bakken.' It stretches from Northern Montana , through North Dakota and into Canada . For years, U. S. oil exploration has been considered a dead end. Even the 'Big Oil' companies gave up searching for major oil wells decades ago. However, a recent technological breakthrough has opened up the Bakken's massive reserves..... and we now have access of up to 500 billion barrels. And because this is light, sweet oil, those billions of barrels will cost Americans just $16 PER BARREL!




That's enough crude to fully fuel the American economy for 2041 years straight. And if THAT didn't throw you on the floor, then this next one should - because it's from 2006!


U.. S. Oil Discovery- Largest Reserve in the World


Stansberry Report Online - 4/20/2006


Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world. It is more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. In three and a half years of high oil prices none has been extracted. With this motherload of oil why are we still fighting over off-shore drilling?


They reported this stunning news: We have more oil inside our borders, than all the other proven reserves on earth.. Here are the official estimates:

- 8-times as much oil as Saudi Arabia


- 18-times as much oil as Iraq
- 21-times as much oil as Kuwait


- 22-times as much oil as Iran


- 500-times as much oil as Yemen


- and it's all right here in the Western United States .


HOW can this BE? HOW can we NOT BE extracting this? Because the environmentalists and others have blocked all efforts to help America become independent of foreign oil! Again, we are letting a small group of people dictate our lives and our economy.....WHY?

James Bartis, lead researcher with the study says we've got more oil in this very compact area than the entire Middle East -more than 2 TRILLION barrels untapped. That's more than all the proven oil reserves of crude oil in the world today, reports The Denver Post.

Don't think 'OPEC' will drop its price - even with this find? Think again! It's all about the competitive marketplace, - it has to. Think OPEC just might be funding the environmentalists?

By the way...this is all true. Check it out at the link below!!!
GOOGLE it, or follow this link. It will blow your mind.
http://www.usgs.gov/newsroom/article.asp?ID=1911

February 15 2011 at 5:04 PM Report abuse +2 rate up rate down Reply
3 replies to lou4two's comment
Azhot1

After 9-11 APPLE was as low as 5.00 a share. I should have held on for 5 more years, but I was happy with some of the profits:-)

February 15 2011 at 4:57 PM Report abuse +1 rate up rate down Reply
1 reply to Azhot1's comment
icemanbill23

Hindsight is always 20/20 my friend...several years ago I attended a stock market investment seminar. The articulate speaker said that he was forbidden from publicly recommending any stock, but then he held up his Apple iphone and spoke..."you know, this is a really amazing device". Regretfully, I didn't take the "hint"!

February 15 2011 at 5:25 PM Report abuse +1 rate up rate down Reply
Alan

With Obama, he`s hoping the "sheep sleep", re-elect him in 2012 so he can again try and remake the U.S the way he prefers to see it. I still don`t trust anything he says. He didn`t get the 1st two years of his presidency correct, by legislating socialism, instead of creating jobs--then after Nov.elections, he crawls back and begs everyone to forgive and forget. When will politicians--whom I dislike as much as lawyers--ever understand that People and Industry vote their wallet. You make my life miserable--I`ll make your life miserable. You--the Federal Government feed at the trough------I am the trough and I choose to put you on bread and water for a while.

February 15 2011 at 4:35 PM Report abuse rate up rate down Reply
3 replies to Alan's comment
rrin431633

Excellent article! I've been riding the recovery trend by buying after a period of consolidation during an upward trend, and divesting quickly.

February 15 2011 at 4:26 PM Report abuse rate up rate down Reply
1 reply to rrin431633's comment
icemanbill23

Good luck with that!...you may need it.

February 15 2011 at 4:39 PM Report abuse +1 rate up rate down Reply
palmbeachlawn

The market is going up because companies are benefiting from the trillions of borrowed and printed money the Fed government has been pumping into the economy. Once the well runs dry (could be 10 months or 10 years???)... look out.

February 15 2011 at 2:51 PM Report abuse +1 rate up rate down Reply
4 replies to palmbeachlawn's comment