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Psychology of the would-be investor

A long-term horizon is the most optimistic when it comes to buying stocks.
By Ian Ogilvie Modified: May 20, 2013 at 11:45 am •  Published: May 19, 2013

“Nothing is harder to bear than a succession of beautiful days.” Consider those words by German poet-philosopher Goethe. That statement applies to human nature broadly, even if it's a bit of an exaggeration. It suggests that as we become used to having good things, we become less able to enjoy them because we gradually take them for granted.

Taken a different way, his words apply to the stock market, too, as investors and others watch from the sidelines wondering when, and whether, to buy or sell.

To people watching the stock markets, the succession of beautiful days represents the stock markets' seemingly relentless climb, without much of a pullback in 2013. The Dow and the S&P 500 are each up about 16 percent year to date.

The succession of beautiful days (aka the stock markets' climb) is hard for people to bear. Three types of people stand out.

First, there are certain investors who have owned stock through the market's climb. They are tempted daily to sell their positions because they want to lock in their gains.

Second, there are investors who think about adding to their existing holdings, but can't bring themselves to do so. They are uncomfortable buying “high,” after what they perceive as a big run up in prices.

And third, there are people who aren't invested in stocks, but would like stock-like returns. They have cash and may have other investments, such as bonds or gold. They also may have sold their stock holdings during the financial crisis, and have a lingering fear of owning stocks. Or perhaps they have never owned stocks but have the idea of owning them; especially when they see the stock markets doing well and think that others are benefiting.

Many of this third group of people won't invest now because, in their view, they've missed the boat. Implicit is the notion that the rise in the stock market is over. The market has to pull back, to correct or something worse.

Instead, taking their cue from the news headlines and talking heads, which don't give them much confidence in the way the markets or the country are headed, they seize on some bit of negative information that they take to be defining and catalytic.

It is not likely a coincidence that many among this third group who are not invested now, and have their reasons for that, were not invested in stocks when the markets were much lower either. Their reasons may have been different then, with the same result.

Is it possible that the market's rise is finished for 2013, or that the market may head lower? Of course it is. But for a long-term investor, that question should be beside the point. It's probably not a great time to buy stocks today for someone who may sell them a year from now. Anything can happen in a year. But a time horizon of 10 or more years makes short-term considerations much less relevant.

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