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Investor’s column: Forget about being average and invest sensibly, remain patient

The stock market remains in the midst of a record-breaking period nearly unmatched in our history.
The stock market remains in the midst of a record-breaking period nearly unmatched in our history. AP

The Dow Jones Industrial Average recently closed above 26,000 for the first time. It has been a record-setting period nearly unmatched in our history.

Yet, for the past nine years, the small investor continued to pull money out of the stock market. During that time, the S&P 500 rose 116 percent while reaching 190 all-time highs.

Why were you out of the stock market? If you were, you missed a lot.

But, individual investors are starting to pour money into that same stock market. They invested almost $58 billion during the first four weeks of this year.

This rush into the markets by investors who have been on the sidelines is a classic “melt-up.” They fear missing out on the rally.

Just a sure as the individual investor re-enters the market, we begin to see – what I consider anyway – deceptive advertisements. Most of these are more concerned about getting your hard-earned money into their hands and out of yours.

The following are a few we are starting to see. But, we will see more.

In the hopes that you may be able to avoid some of these pitfalls, here are a few:

Why would you want to invest just to be average? This is the overall theme as advertised on a national financial network station. This is trying to get you to invest in an actively managed mutual fund that says it gives you the opportunity to outperform what they call average returns.

They are referring to unmanaged indexes such as the S&P 500, the NASDAQ and others as the average they intend to outperform. In reality, actively managed funds (think higher expense and perhaps higher risk to overcome that expense) do a poor job over time trying to outperform an unmanaged index or indexes that would represent the industry the mutual fund invests in.

Yes, there is reason to have actively managed mutual funds in some portfolios but overall most investors, particularly those just now getting back in, will be better served by investing in unmanaged indexes rather than an actively managed mutual fund.

In this case, if you are trying to be more than average, you will end up with a return that is less than average.

Another commercial I am seeing is one we always see when the market melts up – the “trade station.” This is where you see the pretty charts with all kinds of colors to ooh and aah you. Up-to-the-minute quotes and cell phone text messages to alert you to new opportunities. And on and on.

I always like the one where the guy places an order, swings his chair around and goes out to play basketball with his kids. When everything in the stock market is going up, the proverbial day trader will think he’s a genius. And he or she may very well be successful for a time. But, sooner or later, the easy money will be gone.

Traders lose money and realize too late that they did it wrong. They will leave the market and then return once again after the next “melt up” begins. Soon we will begin to see trading programs that they say have made someone rich beyond belief. If you would just send them some money, you too can become super wealthy.

As the market continues to climb (never a sure thing), we will see local get-rich-quick schemes. Just bring them your money. (These types of seminars are not to be confused with the informative seminars sponsored by our local professionals). As a wise man once said to me early in my career: Why would anyone who has developed a truly successful investment program sell you the rights to that?

Finally, we haven’t heard it yet, but will soon: “It’s different this time.” The markets will grow forever no matter what. No, this time is not different. At some point, the markets will correct and perhaps drop precipitously; people will get scared and leave the market only to repeat the same failed investment pattern over again.

This time, make it different. Invest sensibly for the long term. Buy quality, keep costs low and don’t get caught up in the hype.

Finally, congratulations to my friend Ralph McInnis on his recent retirement. Here’s hoping you have a healthy and happy retirement.

Michael T. Doll, an investment adviser with the Longboat Key Financial Group, can be reached at 941-896-2437, or at michaeltdoll@longboatkeyfinancial.com.

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