The stock market is starting to become cocktail chatter again.  After the debacle that was 2008, and the rally that we’ve seen over the last six months, many who ran from stocks are starting to come back.  There are stories about the “seller’s remorse” that many are feeling because they moved out of the markets in February and March and have missed the recent rally.  There are other stories from the financial press offering guidelines on how to get back in.

So, where do we go from here?  It’s not easy to say.  In fact, I would say it’s impossible…but it’s a question that begs an answer.  I just read a story that makes a case for Dow 14,000.  Over the weekend, I read one that called for a pullback to March lows.  So, what’s an individual investor to do?

The Positive Sign:
•    Our net worth increased in the 2nd quarter of this year…for the first time since 2006.  The rally in the market and an uptick in real estate values have helped to make us less poor.
•    There are signs the consumer is coming back.  Consumer spending is a key for our economic recovery.  Last week we had a better than expected reading on retail sales in the last month.
•    Fed Chairman Ben Bernanke said that the recession is “most likely” over.  Let’s hope he’s right on this one.
•    Industrial and manufacturing activity picked up in the last month.
•    Housing starts and permits rose to their highest level since last November.
•    Analyst upgrades of companies are becoming more common, a sign that business may be getting better.  Just last week we had Proctor and Gamble, Sandisk, Apple and the entire homebuilding sector benefit from analyst upgrades.
•    Fewer unemployment claims last week…although continuing claims are an ongoing concern.

So, there are lots of positive signs telling us the market should continue to rise, correct?  Not so fast.

The Negative Signs:
•    The dollar just hit a one-year low against a basket of world currencies.
•    Credit problems have not gone away.  Bank of America and Citigroup reported that customers defaulted on their credit cards at the highest rates since the onset of the recession.
•    Unemployment hit a 26-year high in August.  And it’s expected to go higher before year end.
•    The return of the day traders.  Major online brokerages reported a 14-18% jump in trades in August.  This a bit of a contrarian sign…it tells me that a lot of people are succumbing to the “greed” emotion and trying to catch the wave of the recent market rally.  Remember the day traders in the late 90′s?

I’m sure I’ve missed some signs, but back to the original question.  We have lots of positive signs and lots of negative signs…what’s the individual investor to do now?

My advice is to control what you can control. You can’t control the markets.  But you can control your risk exposure through asset allocation and diversification.  You can control the liquidity you have and need in your portfolio.  You can control your investment fees and trading costs.

That sounds a lot like the passive investment strategy we use at my firm.  So my advice is to go passive.  And that doesn’t mean you just buy and hold.  It means you buy, you hold, and you rebalance when the moves in the markets take you away from your target allocation.  It’s a proven strategy that, over time, forces you to buy low and sell high.  Isn’t that the way we’re supposed to play this game?

Photo by: zaphgod