Some investors came close to panicking last week. I started to salivate.
I'm not the only one. Although cash levels inside stock mutual funds are at historic lows, plenty of investors have cash on the sidelines, waiting for this parabolic move up in stock prices to end. According to the Investment Company Institute, money-market mutual fund assets topped the $2.5 trillion mark last week, with more than $1 trillion of that held by retail investors. Like shoppers waiting for the next 20%-off sale, investors don't want to be the last buyers before a stock market crash.
Short-term thinking
Of course, I know that I shouldn't think about it that way. If you're an investor for the long haul, you shouldn't be concerned about paying a few cents more for shares of a strong company. After all, if those shares double or triple in price, that minuscule difference in what you paid will be almost undetectable.
What's more, just as there's risk that you may be buying at a top, those on the sidelines risk missing out on lucrative stocks while searching for that last penny of value. Consider, for example, some stocks that had big moves since the Dow's record highs in early 2000. When the Dow finally hit a new record last October, you might have decided to wait for the market to cool down a bit. Yet if you had, you'd still be waiting, and you would have missed out on some substantial additional gains.
|
Stock |
Price on 1/14/2000 |
Price on 10/3/2006 |
Price on 6/11/2007 |
|---|---|---|---|
|
Caterpillar (NYSE:CAT) |
25.97 |
65.11 |
78.75 |
|
3M (NYSE:MMM) |
49.66 |
74.03 |
85.30 |
|
Boeing (NYSE:BA) |
44.00 |
81.78 |
97.55 |
|
ExxonMobil (NYSE:XOM) |
41.88 |
65.41 |
83.06 |
Heck, even if all of these stocks suffer a 20% correction, you'd only save a few bucks on Boeing and Caterpillar, and you'd still have to pay more for ExxonMobil.
Psychology and you
Despite the risk of never getting a bargain price for stocks that interest you, waiting for better prices does make sense for some investors. It all depends on your temperament. If you know that you'll beat yourself up over buying a stock at its all-time high right before a crash, then you're apt to make irrational decisions later on. If waiting for a dip to buy prevents you from prematurely dumping a stock you'd intended to hold for years, then you should wait. If the opportunity with that stock never comes, there are thousands of other prospects that might work out better for you.
Nevertheless, for most investors, it's better not to focus on short-term price movements. It's one thing if you think a stock is truly overvalued -- if paying too much makes the stock unattractive, then rejecting it until you can get a better price is the smart move. But if you're waiting just because you feel like the market's due for a fall, think twice. Even during major market crashes, not every stock falls. If you've really found a promising company, you might never get a better chance to buy it than now.
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Fool contributor Dan Caplinger isn't the best investor in the world, but he knows his own idiosyncrasies pretty well. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy won't crash on you.
