Today, Investors have become more enthusiastic about buying stocks. Although I don’t see euphoria about stock ownerships yet, but stock investing has become trendier. This is just my observation, entirely based on anecdotal evidence. Perhaps it’s a reflection of the stock market’s recent history—the way things have been going up nearly every year for the last decade or so.
There are always good reasons to buy stocks—and then there are not so good reasons to buy them. Readers of this blog would know that I have been a regular but patient buyer all along. But I try to stay steady in my approach. Neither overly enthusiastic, nor outright pessimistic about stocks.
In the spirit of self-introspection, here I list some good and some bad reasons for buying stocks. First, the bad reasons since this list is longer:
- Fear of missing out: “The stock market has been going up for several years and I haven’t invested in it. If I don’t invest now, I would miss out on even more gains.”
This is likely to be the most common reason why individual investors are jumping on the investing bandwagon today. Folks tend to look at the near past to predict what will happen in future. But there are no certainties in life. If these newbie investors don’t have a good plan for a possible market drop back, they could be in for a bad surprise.
- Upbeat on the economy: “The US economy is out of the doldrums. It has been growing nicely and the outlook appears upbeat.”
This is indeed the case today. Prospects of an economic slowdown appear dim, at least in the near term. However, as I’ve pointed out in previous blog posts, economic direction is nearly impossible to predict correctly. We can’t be sure how the economy will do over the next one or two years.
Moreover, the market tends to price in popular narratives. So it is conceivable that stocks have already gone up anticipating future economic growth. Even if this expected economic growth comes to pass, that might not be enough to propel stocks higher from here.
- Going with the herd: “I am buying because everybody else is buying.”
In other words, keeping up with the Joneses. There is more chatter today about stocks than in past years. People have successful investing stories to tell each other. Just last week, someone at a party I attended was recounting how he bought Tesla (TSLA) at $200 last year and sold it at $350 in six months.
We all have our herd instincts. It is easier for regular investors to just follow what others are doing. It feels like the safe thing to do. In reality, it may not be so.
- Speculative fervor: “I am just trying to double my money and I think I know which stock to buy.”
I might believe I know how to profit from this rising stock market. And I might also be confident I will be able to step aside quickly if the market goes downhill.
For most investors, this sort of speculative investing doesn’t end well. After all, how many wealthy market timers and frequent traders do we know personally? Besides those who are advertising their services (or selling their books) to the masses.
Good reasons: The way I look at it, there are really only two good reasons for an individual investor to buy stocks today. For that matter, any other time too, not just today.
One, when I am investing as part of my long-term investing/saving plan. I have a long time horizon (at least five years out, if not longer). Perhaps I am investing for my retirement or kids’ education. I might be doing dollar-cost averaging into my retirement account, a 401K or an IRA.
Whether the market is up or down today wouldn’t change my investing plan. It makes no difference since I am not planning to yank money out of my IRA any time soon.
This, I consider passive investing. Such an investor would be completely justified in buying stocks (directly or via ETFs and mutual funds). It works well as long as we have faith in the long-term durability of the economy and patience to ride the roller-coaster the stock market rides. I did this for twenty years in my 401(K).
The other kind of good investing requires more time and experience. It is what I consider active investing. I do this today in my portfolio. It is how I actively manage a portfolio that comprises of not only stocks but other alternate investments too. I have a carefully thought-out plan in terms of asset allocations and investing horizon. Over time, as stock prices fluctuate, I rebalance assets. I may be selling or buying stocks to rebalance. I could also be selling an over-valued stock (or an index fund) and reinvesting the proceeds into an under-valued stock.
So yes, it’s possible that an active investor like me would be buying stocks today. If so, it won’t be due to any of the bad reasons listed above.
If you are buying stocks today, I hope you also have a good reason to do so.