Unless something dramatic happens in the next few hours, it looks like investors will have made it successfully through September and October — the two most dangerous months of the year — without any major damage to their stock portfolios.
In fact, the major indexes will close out October at or near record levels.
The stock market advance comes at a time when casual observers might think it is time to move to the sidelines to protect recent profits. The markets did get rattled when the federal government went into a partial shutdown earlier this month, and the situation with budget and debt ceiling issues is far from resolved.
Recent reading by the University of Michigan and the Conference Board show consumer confidence is fragile, at best, because of the lingering weakness of the labor market and uncertainty about the fate of health care reform.
A quick scan of headlines sees comments such as, “Five signs that the market bulls are getting it wrong,” and “Simple math does not support the bulls.”
Many analysts are suggesting the traditional “wall of worry” is an obvious warning to be cautious. After all, no one has ever gone broke taking a profit, right?
The problem with taking a profit is knowing when to get back into the stock market. You’ll never see a headline saying, “Rally starts tomorrow.”
Instead of taking the advice of current day-traders, it might be more prudent to follow the direction of those in the past who have achieved exceptional success as investors.
Peter Lynch set the standard for mutual fund managers when he headed the Fidelity Magellan Fund between 1977 and 1990. When he started, the fund managed $16 million in assets. When he retired, the portfolio was worth $14 billion.
Lynch points out investors who stayed fully invested between 1992 and 2012 — a period of great economic and social turmoil — realized an average annual return of 8.2 percent based on the performance of the S&P 500 stock index.
However, being out of the market for the 10 best days in that period of about 5,000 days when the markets were open would cut the return to just 4.5 percent.
Missing the 30 best days would erode all gains and being out of the market for the best 90 days would result in a portfolio loss of 9.4 percent a year.
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves,” said Lynch.
Perhaps Warren Buffett summed it up even better, saying, “Be fearful when others are greedy. Be greedy when others are fearful.”
A new survey from BlackRock shows affluent investors are clearly fearful. The report finds 48 percent of all investable assets are currently held in cash, with only 18 percent in stocks and seven percent in bonds.
Bottom line: Going into the last two months of the year, the Dow industrials are up nearly 19 percent, the S&P 500 is up 25 percent and the Nasdaq composite has advanced a staggering 32 percent.
Since investing is not an all-in or all-out proposition, cashing in some gains could be prudent for some. Others would say stocks are still the best game in town.