One of the most common questions many of us in the investment community are asked can be paraphrased as “is now a good time to invest in stocks?” The answer to this question consists of two parts. The first is a clarifying question: “When will you need the money?” The second, depending on the response to the first, is either “no, given your time horizon” or “yes, as long as you’re willing to stick with your investment strategy.”

The reason for first asking about when you the need money is to assess your ability to withstand a short-term loss. The market ebbs and flows. On any given week, month or year, stocks can be up or down. Short investing horizons can lack the necessary time needed to recover from a stumbling Mr. Market. This is why money needed within two years (and up to four or five years for conservative investors) should not be invested in stocks.

The math changes for money not needed for longer time periods. Since 1926, large-cap stocks have risen during 86% of all rolling five-year periods according to the Ibbotson SBBI Yearbook (Duff & Phelps, 2016). Extend the time period out to 10 years, and large-cap stocks have risen 95% of the time. These numbers include the Great Depression, World War II, the 1970s’ stagflation, the 1987 crash and the 2008 financial crisis, among other bad periods. This is food for thought for those of you who are worried about allocating to stocks right now because of valuations, the extent of the recent rally, the Fed, the Trump administration, terrorism, etc.

Since some of you may prefer figures based on more recent history, I ran the numbers assuming that someone got into the market shortly before each of the last two bear markets. A person who bought shares in the Vanguard 500 Index fund (VFINX) at the start of 2000 would have realized a profit on their investment by 2006. Move the start date up to January 2007 and the same investor would have realized a profit by 2012. Both scenarios assume a buy-and-hold investment was made solely in the S&P 500 index fund with no other action taken. Note that the second example assumes an investor got into the market just before the worst bear market since World War II started.

There are many in the investment profession who would instead answer the question of “is now a good time to invest?” with analyses of valuation ratios, economic data, technical analysis and the like. (I have been guilty of doing this as well.)  The detailed analyses and well-thought-out forecasts can provide comfort to the psyche of the person who is trying to decide whether or not to buy stocks right now. Rather than relying on analyses and forecasts to make decisions, I would encourage you instead to simply take a deep breath and invest if your goal is to increase your wealth over a time span of, say, five years or longer. You will be far more likely to realize a positive return on your investment by doing so then by relying on predictions of what Mr. Market might do.

Plus—and this is an extremely important point—what you do after you invest matters far more than when you invest. Analyses by Morningstar and analytics firm DALBAR show that investors commonly realize returns that are lower than the actual funds they invest in. The reason is simple: bad timing decisions. Investors too often think they know when to get in and out of the market. Most investors would do much better by simply buying a low-cost, broad market index fund and not looking at their account for several years.

If you’re still nervous about getting into the market today, next week or on any other given day after having read this week's commentary, there are two things you can do. First, pull out a calendar, circle one day three months from now, six months from now, nine months from now and 12 months from now (or any time interval you feel comfortable with). Then invest a portion today and a bit more on each of the future days regardless of what is occurring on each particular day. Second, diversify among various asset classes, such as bonds and real estate investment trusts (REITs). The first step will reduce the odds of investing on a suboptimal day. The second step will reduce the volatility of your portfolio, allowing you to stick with your strategy for a longer period of time.

• First Steps to Successful Investing – This AAII Investor Classroom lesson explains how to set up a personal investment strategy.
  
• A Lifetime Investment Strategy – AAII founder and chairman Jim Cloonan’s guidelines for the long-term successful management of your stock portfolio.
  

• Model Shadow Stock Portfolio: New Additions, Plus Value Leads – Cloonan gives insight on the latest changes and the portfolio’s performance in the new January AAII Journal.
  
• Vanguard’s Dynamic Spending Strategy for Retirees – This hybrid approach adjusts portfolio withdrawals within preset limits to give retirees an “all-weather” strategy.
  

Fourth-quarter earnings season will “officially” start next week. Joining Dow Jones industrial average component JPMorgan Chase & Co. (JPM) on Friday will be Bank of America (BAC), BlackRock (BLK) and Wells Fargo (WFC). In total, seven members of the S&P 500 will report.

The week’s first economic report will be the Labor Department’s November job openings and labor turnover survey (JOLTS), which will be released on Tuesday. Thursday will feature December import and export prices. The December Producer Price Index (PPI), December retail sales, November business inventories and the University of Michigan’s preliminary January consumer sentiment survey will be released on Friday.

Six Federal Reserve officials will make public appearances: Boston president Eric Rosengren and Atlanta president Dennis Lockhart on Monday; Chicago president Charles Evans, St. Louis president James Bullard and chair Janet Yellen on Thursday; and Philadelphia president Patrick Harker on Thursday and Friday.

The Treasury Department will auction $24 billion of three-year notes on Tuesday, $20 billion of 10-year notes on Wednesday and $12 billion of 30-year bonds on Thursday.

Optimism among individual investors is starting 2017 at a six-week high, according to the latest AAII Sentiment Survey. The rise in optimism comes as both neutral and bearish sentiment declined modestly.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 0.6 percentage points to 46.2%. Optimism was last higher on November 23, 2016 (49.9%). The rise keeps bullish sentiment above 40% for an eighth consecutive week and above its historical average of 38.5% for a ninth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 0.1 percentage points to 28.6%. This is the fifth consecutive week and the seventh time in eight weeks that neutral sentiment is below its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 0.5 percentage points to 25.2%. This is a five-week low; pessimism was last lower on November 30, 2016 (25.1%). The decline also keeps bearish sentiment below its historical average of 30.5% for the eighth time in nine weeks.

All three sentiment measures are starting the new year within their typical historical ranges. The optimism shared by many, but not all, investors extends a shift in expectations that started the week of the November election.

The potential impact that President-elect Donald Trump could have on the economy is encouraging some individual investors and creating uncertainty or concern among others. Also influencing investor sentiment are valuations, earnings, consumer sentiment and the magnitude and timing of future interest rates.

This week’s special question asked AAII members what they thought will most influence the direction of stock prices in 2017. More than a third of all respondents (37%) said the policies instituted by the Trump administration and the legislation passed by the Republican-controlled Congress. Tax reform was listed by 18% of respondents, while deregulation and federal spending were each cited by 5% of respondents. Beyond the political arena, slightly more than 9% of respondents said earnings will influence stock prices, 8% said monetary policy and 6% said consumer sentiment. Some respondents gave more than one factor in their answers.

Here is a sampling of the responses:

• “Actual government changes by the Trump administration versus the high expectations for him.”
• “President Trump’s economic plans and actions.”
• “The extent of deregulation and changes in trade policy.”
• “Federal Reserve actions and passed tax legislation.”
• “Earnings growth.”

Bullish: 46.2%, up 0.6 points
Neutral: 28.6%, down 0.1 points
Bearish: 25.2%, down 0.5 points


Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%

Bonds and bond funds accounted for the lowest percentage of individual investors’ portfolios in 17 months, according to the December AAII Asset Allocation Survey. Cash allocations rose last month, while equity allocations were barely changed.

Stock and stock fund allocations declined by a very modest 0.1 percentage points, to 66.3%. December was the 45th consecutive month with equity allocations above their historical average of 60.5%.

Bond and bond fund allocations declined 0.6 percentage points, to 15.8%. Fixed-income allocations were last lower in July 2015 (15.5%). The historical average is 16.0%.

Cash allocations rebounded by 0.7 percentage points, to 17.9%. The increase was not large enough to prevent cash allocations from remaining below their historical average of 23.5% for the 61st consecutive month.

The drop in fixed-income allocations followed the rise in bond yields that occurred during the second half of 2016. In addition, the Federal Open Market Committee raised the interest rate mid-month and forecast additional rate hikes to occur in 2017. Many AAII members have previously expressed concerns about a drop in bond prices due to rising yields.

Last month’s special question asked AAII members how their allocations as of December 2016 compared to what they expected their allocations would look like at the start of the year. Nearly 37% of respondents said their allocations were similar to what they had anticipated they would be. Slightly more than 18% had greater-than-expected exposure to stocks and stock funds. About 15% ended the year with a larger-than-anticipated cash position. Just under 11% said they had a smaller-than-forecast allocation to bonds and bond funds, whereas 9% described their stock and stock fund allocations as being less than expected.

Here is a sampling of the responses:

• "My allocation is a little light on stocks right now as I have recently taken some gains after the market run up.”
• "Too much cash; waiting for a pullback.”
• "About the same since I’ve been rebalancing along the way.”
• "Equity percentage has risen more than anticipated.”
• "Once I see what President Trump proposes to do with the economy, I might make allocation adjustments.”

• Stocks and stock funds: 66.3%, down 0.1 percentage points         
• Bonds and bond funds: 15.8%, down 0.6 percentage points
• Cash: 17.9%, up 0.7% percentage points

• Stocks: 30.0%, down 1.2 percentage points
• Stock funds: 36.4%, up 1.1 percentage points
• Bonds: 2.8%, down 0.2 percentage points
• Bond funds: 13.0%, down 0.4 percentage points

Take the Asset Allocation Survey.

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