Is the Market High?

I'm a huge fan of The West Wing. So much so that my wife got me the box set of the TV series for Christmas.

Naturally, I love the gift. But I'm writing today because there's a particular episode in which President Bartlet's chief of staff, Leo McGarry (played expertly by John Spencer, who died last year), asks two of the administration's top economic advisors where the stock market will be a year later.

One answers "great, up 1,000." The other? "Terrible, down 1,000." And Leo's response to both? "One of you is going to look pretty stupid in a year."

Economists can't agree on anything
Or they could both could look stupid. Such is the nature of the stock market. Over short periods of time, gains and losses come in waves -- if at all.

Which brings me to 2007. After a stellar 2006, some believe 2007 will be a rough year for investors. Let's start with John Mauldin. My favorite bearish analyst is a sharp commentator on the forces that shape the economy. He believes 2007 will see a mild recession. Why? Read on:

"We have had a real asset bubble in housing. Bubbles do not end without pain," Mauldin wrote in a recent edition of his newsletter (login required). "U.S. homeowners have used the rise in the value of their homes as a source for increased consumer spending through Mortgage Equity Withdrawals (MEWs) ... even while savings were negative."

In other words: Without home equity to juice spending, growth can only slow.

But not all economists agree with Mauldin. Of the forecasters interviewed by BusinessWeek for its annual issue covering the economy, 58 agreed that the U.S. economy would see steady improvement this year.

Time in the market trumps market timing
Who's right? I don't have the economics training to tell you. Fortunately, that's not what matters. Evidence suggests that time in the market is far more important than market timing.

Which evidence? Read The Millionaire Next Door. Authors Thomas Stanley and William Danko found that 95% of millionaires owned stock and that millionaires were almost never traders.

From the text: "Only 9% of the millionaires that we have interviewed hold their investments for less than one year." Even more telling: 42% of millionaires hadn't executed a trade in the year before talking with Stanley and Danko.

Remarkably, 32% of millionaires held stocks for more than six years. That is, they carefully researched the stocks they purchased and then bought to hold as long as they could, regardless of what economic prognosticators had to say.

Millionaire Fools get paid
Unfortunately, Stanley and Danko don't say what sorts of stocks millionaires buy, but I have a feeling they're a lot like the dividend-paying firms that James Early seeks for his Motley Fool Income Investor service.

Dividends, after all, accounted for 97% of the market's total return from 1871 to 2003. That's why Wharton professor Jeremy Siegel counsels investors to stick with big payers and reinvest the proceeds.

Recent history reaffirms his view. Consider this list of winners:

In these cases, dividend growth and capital gains went hand in hand. That's a one-two punch that made for a pretty impressive total return over the trailing five-year period.

Get rich slowly
The market may or may not be high. We can't know for sure. That's why you should ignore the prognosticators. One-up them instead by regularly adding new money to stocks that pay you, and then reinvesting the proceeds.

Don't know where to start? Consider test-driving Income Investor free for 30 days. You'll get access to the entire portfolio, which is yielding more than 4% as I write and which has beaten the market by more than 8 percentage points since inception. There's no obligation to subscribe.

Fool contributor Tim Beyers didn't own shares in any of the firms mentioned in this article at the time of publication. The Motley Fool's disclosure policy is one in a million.