Markets are Surging, Is Now the Time to Increase Risk? A Prospective on Investing

February 2013.

With major stock markets climbing back to within a few percentage points of their record highs in 2008, many investors are just now increasing risk by adding more stocks to portfolios.  Certainly, recent mutual fund flow data reported by Investment Company Institute show investors are loading-up on stock mutual funds at rapid rate.

By itself, a spike in equity fund flows may be viewed as a contrary indicator, with a negative influence on future returns.  That is the contrarian point of view to which many “investment advisors” were proponents of prior to the Great Recession.  Theoretically, when so many investors are bullish, they have already bought, which leaves relatively few new buyers.  Any bad news could cause a stampede of sellers, without enough off-setting buyers.  In this scenario, prices cannot help but decline. 

However, there is a great amount of pent-up demand for the market and stocks after five years of a recession.  That also means there is cash in peoples’ pockets which is making 1.0% to 1.5% in returns if they are lucky.       

It seems many investors are chasing performance, investing in the asset classes that did well in the recent past. Many investors missed much of the move up in stocks since the Great Recession in 2008, because they were overly fearful.  Now some of these investors run the risk of getting back in near the high point of the Market.  Not surprisingly, “buying high” after a market rally is not a strategy recommended by most successful investors.  It can be a recommendation of investment advisers who only want to make a buck from their clients.

At this time, organizations, like the Gainesville Charitable Foundation, may be inclined to chase the markets higher by increasing exposure to risky assets. This is NOT a prediction of pending market doom or a recommendation to sell all stocks. Positions in equities (stocks) maintain should make-up a healthy allocation in most investment portfolios. My suggested approach includes the following:

  • Disregard the elation that comes along with market rallies
  • Dodge the urge to “buy high”
  • Be ready to buy at the next “panic in the market”
  • Stick to your long-term market plan for the percentage of assets in each type of investment

For now, the trend is definitely to the upside.  Should stock prices continue higher, the Gainesville Charitable Foundation should be poised with a portfolio that will participate.

The Gainesville Charitable Foundation must determine the direction it wishes to go.  Don’t listen to people who make their money churning the account of the Gainesville Charitable Foundation.  The Gainesville Charitable Foundation board of directors must be pleased with the overall strategy during the 2012 year of investing.  Compare the Gainesville Charitable Foundation’s portfolio with the market indicators.   Did Gainesville Charitable Foundation generally benefit from last year’s and January 2013’s strong market?  What does the Gainesville Charitable Foundation believe were the soundest asset allocation decisions it made over the past thirteen months?

 It is important to note that there can be many good reasons to consider increasing risk.  Not all risk is bad.  Most investors need to accept some level of risk to achieve their financial goals. The circumstances of the Gainesville Charitable Foundation may very well make it prudent to shift towards a more aggressive portfolio.  If so someone needs to assist the board of directors to make that switch.  I believe the key is to focus on a long-term strategy based on research, not emotional factors such as fear and greed.  I also don’t believe the “black box” approach but a real investment strategy than which the investment adviser   

 

Major Markets

Total Returns

 

1-Month

12-Month

Vanguard Total Bond Index Fund

-0.72%

2.40%

Vanguard 500 Index Fund

5.18%

16.61%

iShares Russell 2000 Index Fund

6.24%

15.71%

Vanguard Total International Index Fund

3.34%

13.81%

Source: Morningstar (data as of 1/31/2013)

The index funds in this chart are provided for informational purposes only and should not be used as the basis for making an investment decision. 

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