There are a lot of interesting quotes talking about the stock market. My favourite one is definitely:”You should buy when there is blood on Wall Street”. I really like the analogy of this quote since it doesn’t only tell you that you need to invest when everybody is running away from the stock market (to buy bond funds) but it also tells you how scary it is to be a contrarian.
Since March 9th, 2009, the S&P 500 has soared by 70%. While the 2008 credit crunch was the most brutal drop of the index, 2009 showed us the most incredible rise of the S&P 500 of its long history.
According to the Investment Company Institute, 24.6G$ exited the stock market since the beginning of 2009. During this very same moment, 455.6G$ (yup, you read right, 455G$!) were invested in bond funds. While the interest rates were at their lowest level ever, it was the worst time to buy bond funds!
You might have been burnt by the market but it doesn’t mean that you should hang yourself with bonds
I understand the logic where investors who lost 50% of their portfolio twice in the same decade (remember the techno bubble with Nortel, JDS Uniphase and Cisco plummeting?), thought they could not get burnt a third time. However, investing in a bond fund is probably much worse than looking at proper investing strategies (with a sound asset allocation!).
I’ll explain this in another post, but just keep in mind that the value of bonds drop when interest rates increase. Therefore, if you buy a bond fund, your portfolio value will drop at each interest rate increase (note that it already started in Australia and Canada where their central banks have started to increase their prime lending rate). So if you fled the stock market to buy a bond fund, you are doing it at the perfect moment to lose what is left in your pocket…
Rational vs Irrational
The biggest problem is that people always think the same thing: “I’ll come back to the stock market when it’s back up”. What is the point? You will have lost the opportunity to make money? I was granting leverage loans (borrowing to invest) from 2003 to 2007 and the peak of investing came in 2006-2007. People wanted to invest more and more money in the stock market based only on the fact that “it was going up”. Therefore, they invested with little knowledge and a very bad investing strategy (getting a quick profit out of a few trades).
Those very same people tend to sell everything when it goes bad and whine that they lost a lot of money in the stock market. This is why they are looking for bonds as a safe haven. However, when interest rates start rising, they will lose money again, ironic, isn’t?
The rational approach is to invest in the stock markets when it is low (like right now). In a few years we will look back at what just happened and we will say that it was obvious to determine the right time to invest (2009-2010). In fact, we will say the very same thing we said back in 2004-2005 when we looked at the crash of 2000-2001…
So stay invested and concentrate your efforts on a good investing strategies instead of trying to make the trade of the year or keeping all your money safe in a low interest money market fund…