It's a tricky time for investors, and not just because Halloween is near.
On one hand, many stocks are (still) performing well, so if you're not in the market you're just missing out. On the other hand, the indicators definitely suggest the market is ripe for a major correction. Sticking with stocks or stepping into them at this point in time could deal a blow to your portfolio's value. Should you really be investing in the stock market right now?
The answer to the question is, it depends. Fortunately, we know exactly what it depends on.
Image source: Getty Images.
What kind of investor are you?
First and foremost, if you're struggling with the question of whether to back off of or lean into this current market, rest assured you're not alone. Not even the pros can agree on what looms ahead, in the short run or down the road a bit. That's no surprise either. If anything about this business was perfectly predictable, we'd all be millionaires by now.
With that as the backdrop, the smart-money move here depends on what you're truly trying to get out of the market.
If you're more of a trader and less of an investor, this isn't a time to be piling into new positions. Indeed, it's a time to be scaling back. The S&P 500 (^GSPC -1.46%) is currently up more than 7% from its early October low, and higher by more than 100% since last March's low when stocks cratered following COVID-19's arrival in the United States. Both are unusually big gains for their respective timeframes.
Making these oversized rallies even more daunting is the fact that not once since last March's bottom has the S&P 500 suffered a correction of 10% or more. Corrections are not only considered normal, they are a healthy reset of longer-term rallies. The "we're due" argument actually holds a bit of water here, given that stocks dish out a dip of that magnitude about every other year. Here in the shadow of the S&P 500's foray into record-high territory would be an ideal time to make it happen, as so few people suspect it could.
But there is a complication related to another market trend that can throw off a trader's timing. Right now, we're in the early part of what's usually the best three-month stretch for stocks in a given year. So traders may continue bidding stocks up due to expectations that this year's action will reflect long-term tendencies. That's the biggest risk to anyone making a point of steering clear of stocks at the moment.
Of course, none of these short-term concerns is a real risk to long-term investors who are genuinely looking a year or more into the future. To this crowd, a correction in the immediate future will register as little more than a blip when looking back.
This may help keep your focus on the bigger picture: According to data from online brokerage firm Charles Schwab, between 2000 and 2019 -- a relatively normal environment not crimped by a long-lived global pandemic -- the S&P 500 tumbled at least 10% from a peak in 11 of those 20 years, averaging a 15% setback during each correction. Yet, the market still managed to log a gain in 15 of those 20 years. The average annual performance of the index for that 20-year stretch was 6%, which may not be thrilling, but bear in mind that timeframe includes the dot-com crash and 2007-09's subprime mortgage meltdown.
The point is, stocks may go through a correction in the foreseeable future. To long-term-minded investors though, it just won't matter.
To buy, or not to buy?
While the specific numbers may be news, the underlying ideas aren't. Most investors innately know stocks move forward in long-term timeframes, even if they log the occasional loss in the short run. The risk-based aspect of investing is simply not knowing when these ebbs and flows are going to take shape. It's a risk both types of investors are taking on, even if they don't realize it.
To this end, the best move to make here isn't making an all-or-nothing decision. The right move at this time is identifying which of your holdings are truly meant for the long haul, and which of your trades are more speculative ideas meant to capitalize on momentum, or headlines. Commit to holding onto the long-term positions regardless of what lies ahead in the short run. As for your riskier, more aggressive trades, go ahead and shed the ones you know aren't built to last, and then draw lines in the sand (price points at which you sell them) for the names that lie somewhere between being a long-term and short-term holding.
Although it's often forgotten, the market's best investors understand success is more about risk management and less about identifying the hottest story stocks.
