Advice & Dissent

Jack Calhoun | Principal

Examining the common (non)sense that causes investors to fail.

Is the Rally for Real?

March 2012

A recent article in the Atlanta Journal Constitution featured an angle that I have seen frequently in the media in the past few weeks, which can be summed up in five words:

“Is the rally for real?”

In other words, are stocks going to continue to climb, or are we due for another downturn?

My first thought whenever I read these articles is: What do they mean by “real”? When I look at the gains stocks have enjoyed going back to the recent market low in October, they certainly seem real to me:

So the actual question that is being asked in these articles is: Will the market keep going up?

Now we get to the heart of the issue. The folks who are really worried about whether the stock rally is real are the ones who didn’t participate in it. They are the investors – and investment managers – who got out of the market back in the summer, or never got in it at all after bailing out in 2008-09. Those investors are terrified of buying high and enduring another downturn in the market, which would further compound their losses. They are stuck in the never-ending spiral that is market timing: Always wondering when to get out and when to get back in.

The intrepid investors who have stayed put are enjoying their double-digit gains going back to October – and triple-digit gains going back to March 2009 – and aren’t as anxious about whether the rally is “real”. They have much to show for their discipline, and they know that if the market does go down in the short term it will, sooner or later, reverse its course again. They don’t have to worry about buying high and selling low, because they don’t engage in that loser’s game.

The simple fact is that the market just gained between 20% and 30% in about five month’s time. And the bulk of those gains came in October, when the European debt crisis was in peak frenzy and things were a long way from “calm.” Folks who got out of the market just until things “calmed down” now have their wish, and they have a conundrum. While they were waiting for things to calm down, the market took off. And now they sit on the sidelines wondering what to do.

The rally is for “real”, because it “really” happened. Whether the market goes up, down or sideways from here is beside the point. The lesson is that gains happen in the stock market right when you least expect it, and you want to be sure you are there when they happen.

 

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