Investing in the Stock Market Has Certain Parallels
Here is something for stock investors to contemplate: Investing during a bull market presents a similar challenge to the person confronted with a bowl of potato chips and being tempted within by the now famous advertising slogan: "Bet you can't eat just one!"
Sure, eating more than just a handful or two will be pleasurable to most people but is the pleasure worth the potential pain? Eating up to 3 oz. of the typical chip might expose you to up to half your recommended daily intake of fat and up to one quarter of your daily calories, not to mention a possible stomach ache.
Obviously, the potato chip dilemma would be on a much smaller scale, but a bull market also seems to work by enticing more and more investing, and typically, the initial result is likewise very pleasurable. Since very few things, including eating chips and stock investing offer clear boundaries between what is indeed pleasurable vs. what is downright unwise and likely to cause pain when carried too far, it follows that there is never any clear one-to-one relationship between degree of indulgence and what happens next. Thus, the person who eats many potato chips may or may not suffer any immediate ill effects, or even any at all, while continuing to enjoy the taste.
Likewise, the investor who begins or adds to his/her stock position in the throes of what appears at the time to be a near endless flow of gains, may or may not with any certainty come to regret his/her actions. As the expression goes, "you pays your money and you takes your chances." More than that though, the greater your degree of indulgence, the more likely it is that you are potentially being suckered into the potential excesses that the masses of all investors have created by not being willing to contain their enthusiasm. It's also a little like a game of musical chairs: for those who remember it, the game must eventually wind down and only a few who were seeking chairs can end up considering themselves relatively lucky in the game, those who were not forced out early on.
It is important to recognize, additionally, that individual investors such as you and me, are apparently not the ones driving the markets right now. Large institutional investors and traders are likely the ones hoping to profit from shorter-term market surges. Since these players, and their computers, always have their eyes and screens peeled, they hope to ride the market's momentum and get out immediately if they think they need to. The smaller investor is much less likely to be able to make such an immediate response if the market turns sour and is therefore more likely to experience significant losses, or at least temporary "paper losses," when an inevitable correction occurs. That's why most investors should base their decisions on what's best for long-term gains rather than succumbing to short-term motives.
Like certain other things in life as well, an over-involvement effect can often come into play even under what appear to be the most favorable of circumstances. Indulging what seems to be a never-ending source of pleasure can become excessive and lead to seriously harmful effects. Moderation in even the good things in life seems be a good rule of thumb to follow.
To read my full July, 2014 Newsletter which includes my recommended allocations to stocks, bonds, and cash as well as specific fund/ETF choices, please visit my website.