After an impressive 16% gain in 2012, the S&P 500 appears to be on track for another double digit return in 2013. This fact has apparently not escaped investors’ attention, as money has started flowing back into equity mutual funds after 5 years of net liquidations. Have investors finally learned they probably can’t time the market or will they bail out again at the first sign of trouble?
Many problems still exist and there never seems to be a shortage of issues to worry about. Unemployment has improved, but at a snail’s pace. Budget deficits are coming down, but will still be close to a trillion dollars this fiscal year. Corporate profits are good, but the rate of growth has slowed. What will all of this mean for stock prices over the next 12 months?
Some market analysts are concerned that investors are setting aside their fears in place of greed. Gold prices are falling and money market yields are practically nonexistent. The bond market probably has nowhere to go but down when the Federal Reserve stops printing money. The stock market seems to be the only place to make money. Investors just moving into stocks now need to understand the risk of trend following and invest in a way that allows them to participate in the ups and downs of the market.
Start by understanding your goals and develop a long-term investment strategy to help you achieve them. A good strategy is to allocate your investments between fixed, lower risk investments, and equities for growth. Monitor this allocation and rebalance when the stock market moves higher or lower to take advantage of the market ups. Otherwise, you may find yourself buying into stocks just as the market peaks and you will revert back to buying high and selling low in the next stock market correction. Staying invested and rebalancing helps you to do just the opposite.