On the heels of a 16% advance by the S&P 500 in 2012, investors absolutely poured money into stock funds during the first week of 2013 at the highest rate since the year 2000. In fact, this was the second largest week EVER, and the first week of inflows greater than $5 billion since 2003!
Time to celebrate, right? The coast is clear now that we know who our president is for the next four years, we survived the fiscal cliff scare, the economy and housing markets are recovering, and we haven’t heard anything about Europe for a few weeks…
As we have stated again and again, the paramount driver of investment success is behavior. Given that behavior is often driven by emotion, investors must resist the urge to act on feelings. The last time we saw inflows like this was on the tail end of the euphoria surrounding the tech boom / bubble…and we all know how things played out from there.
Certainly, the economic and political skies seem far more clear now than they were four years ago, but since the S&P 500 bottomed on March 9, 2009, it had already risen 128.7% through December 31, 2012. While we aren’t expecting a crash, we definitely aren’t expecting a repeat of the last four years.
Howard Marks recently wrote, “The greatest of all investment adages states that “what the wise man does in the beginning, the fool does in the end.” The wise man invested aggressively in late 2008 and early 2009. I believe only the fool is doing so now.”
The economy is not the market, nor is the political climate representative of the market. Just because the economy feels better now, doesn’t mean your investment prospects are.