Don't Feel Too Good About the Stock Market Now

Last Updated Apr 30, 2010 5:59 PM EDT

I'm starting to hear investors expressing confidence again about the stock market. And why shouldn't they? I just did a calculation that shows a balanced 60 percent equities and 40% bond portfolio, rebalanced annually, is now above the 2007 close.

Don't want to come off like that old saying "A corpse at every wedding and a bride at every funeral," but feeling good about the stock market, now that it's rallied, is as irrational and predictable as it was having that sick feeling in March of 2009, when it was plummeting to the center of the Earth. We all can appreciate the logic of it being better to buy something on a half off sale than when prices have doubled. Unfortunately, the irrationality of our human nature causes us to consistently ignore this logic.

I don't mean to brag, but I'm among the few who are willing to admit that they haven't got a clue as to what the stock market will do over the next few months. But I do know something much more important - that sticking to an asset allocation target and rebalancing works. Doing so makes you a true contrarian in a world in which human investors are herd animals.

So I hate to rain on your parade, but stop feeling good about the market. Stick to a rebalancing strategy and consider selling some of your equities now. Don't let our short memories lead us to repeat the mistakes of only two years ago.

The author clearly acknowledges he is a hypocrite as he does feel much better about the market today than he did on March 9, 2009. I am, however, practicing what I preach.
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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.