Investors Beware?

The recovery is on its way, say some Wall Street optimists, while others say it’s already here. The only question, they maintain, is whether the market goes straight up from here or whether there may be some potholes on the road to the next bull market. That kind of thinking, say the market bears, is a signal that it’s time to be wary. And in first two trading days of September, historically the worst month for stocks, the market dropped about 2%, giving the bears some ammunition to back up their argument.

Individual investors aren’t helped by conflicting economic signals and the market’s seemingly bizarre reaction to them. In those first days of September, the market sold off despite positive comments on the economy from the Federal Reserve and news that the manufacturing sector expanded for the first time in six months. Speculation over whether the recovery will be V-shaped or W-shaped, say analysts, isn’t much help to investors who are trying to decide where to put their money. A herd mentality, where people put cash into whatever has gone up recently, namely stocks, can also lead to losses if the market rebound runs out of steam. Market historians point out that big gains have at times been followed by equally big drops, as in 1930, when a rise of around 46% was followed by a plunge of more than 50%.

The answer for individual investors, say some financial advisors, may be a dollar-cost averaging strategy, putting small amounts into the stocks each month. If stocks fall, your monthly investment buys more shares, which puts you in a better position to gain from a market recovery, whatever shape it takes.