Stock Market: Goldilocks Meets the Fragile Five and the Three Bears

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Source: http://www.flickr.com/photos/stephen-oung/

The porridge for stock market investors was hot in 2013, with the S&P 500 index skyrocketing +30 percent, while the porridge for bond investors was too cold, losing -4 percent last year (AGG). Like Goldilocks, investors are waiting to get more aggressive with their investment portfolios once everything feels “just right.” Dragging one’s feet too long is not the right strategy. Counterintuitively, and as I pointed out in “Here Comes the Dumb Money,” the investing masses have been very bashful in committing large sums of money out of cash/bonds into stocks, despite the Herculean returns experienced in the stock market over the last five years.

Once the party begins to get crowded is the period you should plan your exit. As experienced investors know, when the porridge, chair, and bed feel just right is usually around the time the unhappy bears arrive. The same principle applies to the investing. In the late 1990s (i.e., technology bubble) and in the mid-2000s (i.e., housing bubble) everyone binged on tech stocks and McMansions with the help of loose credit. Well, we all know how those stories ended … the bears eventually arrived and left a bunch of carnage after tearing apart investors.

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