"Buy low, sell high," the maxim goes. For long-term investors, though, it's OK to buy high.
When the stock market reaches record levels, many investors seem to have two reactions: Either they join the herd and jump in with every bit of spare cash they can find, or they decide they've missed the big advance, so it's too late to invest anything.
With the Dow Jones industrial average holding above 3,200 -- an altitude it has reached by climbing more than 300 points in the last four weeks -- both reactions are wrong, money managers and market observers say. In most cases, they say, unsophisticated investors tend to make the latter mistake, staying out of the market because they are sure it's so high that it must be headed for a fall.
Many people are facing decisions like this now because, coincidentally with the market's recent rise, their bank certificates of deposit, with yields of 8 percent to 10 percent or more, are maturing. Now, with many CDs paying 5 percent or less, people want better-paying investments, such as stocks and stock mutual funds.
Market cycles may influence how and to what degree you get into stocks, but for long-term investors, the risks of staying out of the market are greater than the risks of getting in too late.
"People who have tried to predict the markets are usually right about half the time and wrong about half the time," says Hans Stoll, a professor at the Owen Graduate School of Management at Vanderbilt University in Nashville, Tenn. "It is very dangerous to try and predict when you should be investing."
"We all have the weakness that we think we can call things," adds William Markos, president of Ipswich Investment Management Co. in Boston. In the past, he notes, it might have been possible for an investor to spot major market cycles and move in and out of stocks and bonds accordingly. Not any more.
Today, because of computers and the market's ability to absorb and react to information so quickly, "you have to be in the market because moves take place in such an abbreviated period of time," Mr. Markos says. For example, he observes, the last two big jumps in the market took place in a few weeks in January and February of 1991, as well as the two weeks at the end of 1991 and the beginning of this year.
The risks of trying to time the market can be seen in a study of the bull market that ran from Aug. 12, 1982, through Aug. 25, 1987, a period of 1,267 trading days. According to the study by TNE Fund Group, a unit of the New England Investment Cos. in Boston, a fully invested portfolio in the Standard & Poor's 500 index provided an average annual return of 26.3 percent.
However, if the investor missed just the 10 best days of that period -- entirely possible for someone who got out when the market seem to be near a peak -- the annual return would have been cut to 18.3 percent. Missing the 20 best trading days cuts the return to 13.1 percent.
Of course, this is a hypothetical scenario conducted with a value-weighted index of 500 large-company stocks that few investors would actually own. But it does show that there's little to be gained by waiting for a "normal" market.
Rather, money managers say, an investor should be prepared to make some adjustments to a portfolio of stocks, bonds and cash equivalents such as money-market funds. Before the Federal Reserve's Dec. 20 cut in the discount rate, for example, some investment managers had 10 percent or 20 percent of their portfolios in cash. Now, many of those managers have cut their cash positions in half, or eliminated them entirely. Even before, .. though, they kept at least 30 percent to 40 percent invested in stocks.
"An investor should keep a balance of maturities and asset classes with marginal changes and shadings from time to time," Mr. Stoll says. "But there should not be great changes from one time to another."
"If you're an individual who's sitting on the sidelines, thinking about when you should enter the market, chances are you're going to be wrong," says John Everets, a principal with T. O. Richardson Inc., an investment management firm in Hartford. "For people to accumulate any kind of wealth, they really need a discipline."
For many average investors, one of the most common forms of discipline is known as dollar-cost averaging. Depending on how much money you have to invest, there are two forms of this practice. The long-term form calls for investing the same amount of money in a stock or stock mutual fund every month, every quarter or whatever period you choose. This version can be followed for many years if you choose.
The short-term version is used when you have a large amount of money -- say, a lump-sum retirement distribution or large CD that has matured -- and don't want to commit it to stocks all at once. Instead, four or five equal parts could be invested over several months to a year.
"If I had a client who was sitting on half a million dollars he inherited . . . I'd have him invest $100,000 a month for the next five months," Mr. Everets says.