There’s a reason that people worry about when exactly to invest in the market. As the opening keynote speaker for the 2014 Northern California Financial Planning Association Conference, Barry Ritholtz, Founder and Chief Investment Officer of Ritholtz Wealth Management, drove home the point that as human beings, we are survivors, not investors. Our brains are not designed for the capital markets, because our brains love confidence and certainty even when there is no grounding for confidence and certainty.
It would be easy to support an argument that things are getting better when the U.S. stock market continues to reach new highs, that this would be bullish for the stock market. Nevertheless, as reported in State Street’s just-released May 2014 survey, U.S. retail investors have increased their cash allocation to 36% in 2014 from 26% in 2012, despite the market being higher in 2014. Many investors develop the unfounded certainty that it is bad to invest when things are getting better, when the market is going higher. Actually, the market reaching new highs is bullish for stocks. Trying to time the market paralyzes investors and limits their future success.
Barry Ritholtz referenced a study by Dalbar showing a period where the S&P 500 had grown by 9.14% annually but that the average retail investor using that same index had only enjoyed an annual return of 3.83% for the same period. Our futures are significantly limited by our survival instincts that put fear in the driver’s seat (fear of making a mistake) and that create certainty where there is none (the market is too high to invest). Because of fear and certainty driving investment decisions, because of worries over when exactly to invest, time and time again investors miss out on the potential for more return.
The fact that so many investors are being cautious now by holding a lot of cash will help delay investor exuberance that often signals the end of bull markets. This is when markets do what they do best—improve our net worth over long periods of time as long as we do not interfere.