I wrote my post I’m all in…get ready for the big correction! about six months ago. The S&P 500 Index stood at at 1,883.95 then. Right now, its sitting at 2,031.95, an 8% increase. With a 8% cushion, I feel pretty good that I can survive a 5% drop and even a 10% at this point would be palatable. I already had to endure two sharp downturns, one that took me about 20 points below my starting point–that wasn’t fun. Still, I kept to my guns and felt that there was no fundamental reason for stocks to hold their lows and, sure enough, the markets bounced right back.

This all brings me to the point of this post. I can handle a reasonably large correction because I got in. You can’t do this if you sit on the sidelines waiting. The doom and gloomers are going to be right…someday. They will be gloating with a big I told you so. What they won’t mention is the gains the market had while they spouted off their doomsday predictions. Personally, I want to be sitting on a big gain to weather the storm. Heck, if we can come back from 2008, we can come back from anything!

The stock market is kind of like eBay. If there are a whole bunch of people bidding in the same auction, the final price will generally be higher than if there were just a few bidders. By the same token, if more money is invested in stocks, overall prices increases. It’s the law of supply and demand. (For more on this, see my post here)

If you buy into this theory, here is some goods news. According to this article Investors — individuals and institutions alike — are keeping the lowest percentage of their portfolios in stock in over half a century. It goes on to say, “In fact, that doom-and-gloom thinking itself may be part of the “wall of worry” keeping even more cash out of the market. By that reasoning, stocks could be headed a lot higher before this bull market ends.”

I like this state of things. We’ve got a market that’s performing well despite analysts’ pessimism. We continue to get relatively positive news on the employment and economy fronts. This combined with the higher returns on stocks has got to be convincing more folks to invest in stocks, thereby driving up prices even more. Obviously there will be a sell-off at some point, but that’s just something you live with. Long-term, you should be better off.

On a side note, this article says that people in their 50s and 60s are investing too much money in stocks. Obviously, you need to diversify and don’t put all of your eggs in one basket. :-)

Nice article on the advantages of investing in an index fund.

30 reasons to fall in love with index funds – MarketWatch.

You might also want to read my recent post The Stock Markets: My Theory.

WARNING: Let me preface this blog post by saying that although I am a CPA, I am not a professional investor nor adviser. You should take all of this post with a huge grain of salt :-)

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I have always wondered why the three major stock market indices (DOW, S&P and NASDAQ) always move in concert with each other, generally moving up and down in unison. How is this possible when each has a unique group of stocks? Aren’t there masses of stock pickers buying/selling individual stocks? It just doesn’t make sense…or does it?

Now, if you read the market news, it will say the markets went down because of blah blah blah and the next day the markets rebound because investors ignored blah blah blah. Why would, say, good news for the housing market make the tech-heavy NASDAQ rise? Read more