The Dow passes 15,000! The Dow falls below 15,000! The S&P surpasses 1,660 and slips. As the stock market continues its ascent, with some bumps, the most frequently asked question I hear is: "Should I buy, or is a correction coming?" The answer lies in what your goals are.
Recently, Warren Buffett predicted that stocks will go "far higher" in the long run, so, for those with 10 or 20 years to go before they need their money, investing in a diversified portfolio that includes stocks makes sense. That said, stock indexes have gone six months without even a 5 percent correction -- the last "classic" correction (defined as a 10 percent drop from the highs) occurred in the summer of 2011, when the S&P 500 plummeted by more than 17 percent after the debt-ceiling debacle.
So, is a correction coming? Of course it is, but predicting when that will happen and trying to capitalize on it is a fool's game. That leaves many would-be stock investors with a tough choice: Should they get back into stocks after markets have more than doubled, or should they remain in their cash and bond positions?
Part of the problem is that many investors are still stinging after the 54 percent drop from October 2007 to March 2009. As if that were not enough, confidence was shaken periodically during the recovery, whether from the 2010 "Flash Crash," the 2011 swoon or drops attributed to the European debt crisis.
Those events may explain a recent Bankrate.com Financial Security Index in which a whopping 76 percent of respondents said that they are just saying no to stocks. Economists call this "recency bias," which means that we use our recent experience as a guide for what will happen in the future. So when stocks are soaring, we think markets will keep rising, but when the market plunges, we become convinced that it will never rise again.
Because investors are often guided by emotions, they make bad decisions that can cost real money. The most recent example can be found with those who sold at 2009 lows and then missed out on the 130 percent rise in stocks. But erratic investor behavior is actually quite common. Year after year, research from Dalbar analyzes the difference between how investor returns compare to major indexes, and the news is not very good.
According to Dalbar's latest Quantitative Analysis of Investor Behavior study, mutual fund investors have significantly underperformed the S&P 500 over the past 3, 5, 10 and 20 years. The average stock fund investor lagged the S&P 500 by nearly 4 percentage points per year from 1993 to 2012. The study notes that, "no matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investment are more successful than those who time the market."
So, if are you asking the question about whether it is safe to buy stocks, the answer is NO -- stocks are not a safe investment! And chances are, you are simply repeating your bad investing patterns of the past. But if you are the kind of person who sold out because you couldn't handle the ups and downs of the stock market, there may be a way to enter the stock market without losing your shirt.
Consider keeping your stock allocation to a level where the gyrations don't cause you to lose sleep -- maybe just 10 to 20 percent of your portfolio. By limiting your exposure, you can partially participate in a rising stock market without getting your hat handed to you if/when the correction eventually occurs.Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.