In March 2009, the reeling stock market bottomed out at its lowest point in 12 years. Among those who suffered the most were older adults, who saw nest eggs crumble and financial security vanish. Some sold their shares at or near the bottom and swore off ever investing in stocks again.
The market recovered and set all-time highs this year, with the tech-heavy Nasdaq increasing fourfold and the Dow Jones average almost tripling since 2009. Skyrocketing stocks are causing many who have been out of the market, or have never invested at all, to believe stocks are now a can't-lose bet.
"There's a bit of a complacency, and I think people are taking on much more risk than they realize," says Scott Hanson of Hanson McClain Advisors, a Sacramento, California-based investment firm. "As stocks go higher and higher without any pullback, there's a greater risk in them."
Hanson, who has hosted a radio show in Sacramento for 20 years, is struck by similarities of callers today to those who called shortly before the dot-com debacle of the late 1990s and the real estate meltdown that caused the devastating 2007-2009 recession. "In the '90s, you'd have people planning for retirement and they were loaded up on tech stocks," he says. "And then the tech bubble burst and it was all real estate."
Many small investors make the mistake of believing hot stocks will only get hotter and buy at the top. "When prices go up, they think there's less risk and they want to buy more of whatever's going up, and it's really just the opposite of what people should be doing." Hanson says. "If you're retired and you haven't had a lot of investing experience, now's probably not the time to be diving in with both feet."
Similarly, Hanson says, small investors often buy mutual funds that have a concentration of stocks in hot sectors and have performed well over the past year or so. Many of these funds are actively managed and charge a fee. Hanson notes that so-called index funds, which are simply tied to stock averages such as the Nasdaq or Dow, have outperformed most sector-specific mutual funds over time. And as for trying to pick stocks yourself, the results may be even worse.
"Actively managed mutual funds, with all those educated, smart people doing nothing but managing that money, can't outperform the index," he says. "How is someone from their bedroom on Long Island going to be able to outperform the index?"