What Investing Wisely Is—and Isn’t

If there is one theme dominating financial media this week, it's this: With stocks near record highs, above-average valuations and the bull turning eight, the bull market may be on borrowed time. One article in The Wall Street Journalcites above-average valuations and argues this market is only for speculators-not investors.^[i] A CBS News Moneywatchpiece counsels you to repeatedly sell slices of your equity holdings (never mind the trading costs and taxes) and boost cash, trembling before record highs. A blog post in The Wall Street Journalquotes one analyst as claiming the bull market is currently a whopping 127 years old-"long in the tooth!"-because one bull market year translates into 15.875 human years, we guess.^[ii] We could go on, but suffice it to say many pundits argue owning stocks now is unwise. Here is an alternate theory: That is entirely backwards.

A basic, yet often overlooked, maxim: If you need growth to reach your financial goals, whatever percentage you allocate to stocks is your default. Not cash. What does that mean? It means you don't need to find one, five or 10 solid "reasons to be bullish"^[iii] to own stocks. (Though those may be nice.) What you need is the reverse: a sound, bearish reason not to own stocks. That is, a probable, negative factor carrying trillions of dollars' worth of economic impact that you see and most don't. They don't come often. Sometimes the general public is euphoric and just misses an elephant hiding in plain sight. Other times, it's out of the blue. The keys are the size and that it is probable, not possible.^[iv] That the market is near a record high doesn't register. Valuations are close to the first thing you learn in security analysis and, as such, they feature nearly daily in most financial publications. Widely known. Moreover, high valuations often get higher; cheap stocks and markets frequently get cheaper. Valuations aren't predictive. Finally, however you calculate its age, this bull market has been feared "long in the tooth" for years. It's time to accept the fact bull markets don't die of old age.

It's natural to be worried about where stocks will head. This is perhaps especially true if you sat out of stocks for long stretches in this bull market. It's hard to give up on a thesis that another downdraft will give you a better entry point, or thereabouts. Heck, maybe this is wrong, but perhaps it isn't just the direction that worries folks per se. Perhaps the embarrassment of suffering a market decline freezes folks-they don't want to feel like a "sucker" who bought in last.^[v]

I hope I'm wrong and that isn't your situation, but if it is, consider this your absolution: If you need growth, you need not feel like a sucker for buying or owning stocks today, no matter what follows. Wisdom is realizing cash, bonds and other low-returning securities won't give you the growth you need. Wisdom is seeing no one can be certain of where markets go from here-investing is about probabilities. Wisdom is recognizing only an extreme stroke of luck will lead anyone to pinpoint this bull's peak in real time. Wisdom is seeing if you maintain an allocation to low-returning assets, the probability you reach a growth goal is low. It's higher, even with the risk of a downturn, if you own the higher returning asset class-stocks. Wisdom is knowing whether or not owning stocks results in success in a month, two months, six months isn't the right measure of your decision making. The better question: Are you on track for your long-run goals or not?

The future has never been perfectly clear at any point in market history. There was-and always is-the chance of a downturn ahead. So focus on controlling what you can: how you invest.