"If a cat sits on a hot stove, that cat won't sit on a hot stove again," Mark Twain once wrote. "That cat won't sit on a cold stove either. That cat just don't like stoves."
A lot of investors are showing the same kind of feline attitude toward stocks, after getting burned by the scorching market collapse during the great recession. A survey this year from Bankrate.com found that 73 percent of Americans said they still aren't more inclined to invest in stocks, despite the Dow Jones Industrial Average rising more than 92 percent since the official end of the downturn in June 2009.
Even if you adjust the Dow's October 2007 pre-recession record high for inflation, the market is up more than 3 percent. Nonetheless, a lot of investors — including big university endowments and institutional investors as well as gun-shy individuals — are like Mark Twain's cat, staying firmly out of the market, even as it cajoles, "Here, kitty, kitty, kitty."
Missing the boat — again
On the bright side, it might seem that investors aren't making their usual mistake of buying high by jumping into the market once it's overheated and headed for a fall, after they already panicked and sold low by bailing during the recession. Of course, that's like congratulating yourself for not jumping in the bay after the ship has sailed. And, according to Mary Ann Bartels, chief investment officer of portfolio strategies for U.S. wealth management at Merrill Lynch, playing it safe this time is likely to be another big mistake.
With bond yields in the dumps and cash paying practically nothing while the Federal Reserve keeps interest rates low, "The only other option is equities," she says. "We believe that we've entered a new secular bull market."
A secular bull market means a long-term, overall run-up in stocks, as opposed to the cyclical bucking bulls that give stocks their ups and downs. During the last big secular bull run from 1983 to 2000, the Dow gained more than 900 percent. But that doesn't mean Wall Street has turned into a one-way street, Bartel warns.
"It doesn't mean there won't be a bear market," Bartel says. "Markets will go down at some point by 20 percent to 30 percent. When we go through that, clients can be unnerved."
Bear with the bear
That's what happened on Black Monday in October 1987, when the market recorded its biggest one-day drop. Stocks turned right around, however, and investors were back in the black 20 months later. Investors can expect the same thing as this secular market — which some analysts say could last for 15 years — goes through the normal cyclical ups and downs.
For investors, it means realizing that the best bet for long-term growth still is in stocks, but that they should have a diversified strategy that focuses not on beating the market, but on the returns they need from all their investments to hit their goals, while taking no more risk than is necessary.
"It's important to know why you're invested where you're invested," Bartel says.
Which brings us to another old saying (though not from Mark Twain), that when it comes to the market, bulls can make money, bears can make money, but pigs gets slaughtered. And, for all the frightened felines out there, I'll add this: scaredy-cats starve.
Brian O'Connor is author of the award-winning book, "The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese."