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Worried You Missed the Stock Market Boat? Don't Be.

Most stock market investors are like whiny little kids.

When the market is down, they declare that growth is a thing of the past and civilization is heading toward destruction. When the market hits new all-time highs (as it has recently), they complain that stocks are overvalued and bubble predictions start flying.

One of the most common theories professional investors enjoy pointing to is the negative signal of individual investors rushing into the market, or "dumb money." Not surprisingly, even as everyone proclaims the ignorance of the dumb money, no one actually admits to being dumb money. Considering that most hedge funds and mutual funds underperform a low-cost S&P 500 index fund, individuals who simply manage their temperament and hold on through thick and thin probably deserve the title of "smart money."

Simple sample
JPMorgan Chase
's (NYSE: JPM  ) Asset Management division currently has just under $1.5 trillion under management. But this isn't entirely traditionally "smart" money. Fifty percent of assets are classified as "institutional," but 26% are "retail" and 22% are funds from "private banking" clients. While the assets certainly lean toward institutional money, most investing groups are appropriately accounted for in this sampling.

As stock indices have reached new heights, predictions of a pullback have also reached new levels. But is it justified? Is there no more money left to fuel stock gains? In the first quarter of 2013, JPMorgan's asset management group reported that only 34% of assets under management were allocated to equities, up from 31% in the fourth quarter.

Although market gains affect allocation percentages, if we look back to 2005 and 2006, the average amount allocated to equities was 43%. While I'm not suggesting that the allocation percentages of those days were optimal, a 9% difference on an asset base of $1.5 trillion equals approximately $135 billion of potential buying pressure, most likely both institutional and retail money. And that's just from JPMorgan clients.

Who's hungry for risk?
Should 2005 and 2006, years of potentially excessive and greedy equity buy-in, be used for comparison? Maybe. But maybe not. The constantly changing investing landscape makes most short-term comparisons virtually useless. This change in allocation preference merely suggests that there has been a shift in risk appetite that may or may not change.

However, there is one time-series of data that isn't consistently argued against: the overall performance of the stock market since its modernization, which includes more than 100 years of data. Despite the crashes and rallies, on average, the total return of the stock market has been around 9% per year. So, regardless of how you justify being invested in the market to yourself, it's always the safest move to stay invested and turn down the noise. Take heed from one of the savviest investors of all time, Warren Buffett:

Since the basic game is so favorable, Charlie [Munger] and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.

A bank for the long term?
Wells Fargo
's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 11, 2013, at 3:35 PM, xmlandmore wrote:

    Read Dr. Nu Yu's Market Weekly Update. He says that we are now in the roof phase (i.e., bull trap) of “the Three Peaks and a Domed House” pattern.

  • Report this Comment On May 11, 2013, at 5:23 PM, VegasSmitty367 wrote:

    I'm slowly liquidating my holdings, I see a major correction looming!

  • Report this Comment On May 11, 2013, at 9:57 PM, JapanCurmudgeon wrote:

    Typical Motley Fool article. Here is some information about what might happen; but it might not happen. Now, buy something from us that might include real information you can use. Or not?

  • Report this Comment On May 12, 2013, at 6:10 AM, Billybob402 wrote:

    I like the 3 bucket approach:

    Bucket 1: cash, MM, CD's

    (always growth but no fear)

    Bucket 2: balanced fund like VWELX

    (add to, hold, hold until wicked old)

    Bucket 3: VTI, VXUS

    (buy low, sell high - like now) pick 6 to 12 stocks. And if you are good, 5 to 10 make gains and demonstrate your effective research and evident wisdom. But 1 or 2 of theses babies can be so disasterous so as to negate all of the above. Seems foolish.

    Good luck to all. Peace.

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