Stock Market Approaches All-Time High

This post was updated on February 8, 2011.
The Wilshire 5000 Full Cap Index, the broadest measure of US stocks, rose 0.69 percent on February 7, taking it higher than it was at the end of 2007, right before the market crashed. By this measure, the US stock market is up more than 110 percent from the March 9, 2009 market bottom. While of course this is good news for stock investors, it doesn't mean now is the time to jump into the market.

Investors who own the market through the Vanguard Total Stock ETF (VTI), are still a hair below the 2007 year-end close -- 0.51 percent to be precise -- but have seen a healthy 109.61 percent gain off the March 9, 2009 market bottom. The small lag versus the Wilshire 5000 is due to the fund's 0.07 percent annual expense ratio, and the fact that the fund doesn't include the smallest micro-cap stocks, which performed the best during the period.

The Wilshire 5000 index measures the return of virtually every US publicly traded stock. By contrast, the pure S&P 500 index, which excludes dividends, closed today 10.17 percent below the 2007 year-end close. News reports tend to cite this benchmark, though it is misleading because it only shows part of the return of just 500 companies. Reuters used this index today to report today that Wall Street is back to mid-2008 levels, rather than showing the total returns of all of Wall Street.

Money finally flowing back into stocks
So with the close today, US stocks are now 5.71 percent shy of their all-time high on October 9, 2007. Now that stocks have recovered, the Investment Company Institute (ICI) shows that investors have been putting assets into stock mutual funds in each of the last five weeks.

In other words, investors may be repeating the same mistake that they make in every bull and bear market cycle -- they sell when stocks are cheap, and buy them back when they get more expensive. Fund investors pulled money out of stocks in 2008 and 2009 as the market plunged and now, after that 110 percent climb, stocks seem less risky so they are piling back in.

Remembering the pain of the market plunge might help to make us become better, more consistent, investors. This doesn't mean you should not be investing in the market right now. What it means is that you should temper your expectations with the knowledge that we are a lot closer to the high than the low. And base the asset allocation in your portfolio on your memories of the market plunge, not the optimism that comes with 23 months of rising share prices.

More on MoneyWatch
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5 Reasons why the Stock Market is Overvalued
Stocks Are On Sale! Why Are So Few Buying?

Allan Roth

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.

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