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Summary

  • 2014 marks the fifth year of a bull market with major U.S. indices nearing new milestones but more surprising is the apparent comfort level of most investors.
  • Investors need to be aware of their confidence becoming complacency ahead ofthe inevitable years of investment uncertainty.
  • The key is to prepare in advance for any end to plentiful investment days rather than trying to predict the timing of market downturns.

So far, in 2014, the fifth year of a bull market, stock markets have set all-time highs. Major U.S. indices are nearing new milestones: 2000 for the S&P 500 Index and 17000 for the Dow Jones Industrial Average. Yet even more surprising than a five-year bull market in which stocks are reaching these landmark heights is the apparent comfort level of most investors.

The most common measure of market volatility is the CBOE Volatility Index, which measures near-term market expectations by tracking S&P 500 Index options. It's commonly known as the VIX or "fear" index, since it essentially gauges investors' current confidence in the markets. For example, at the height of the Financial Crisis in 2008, the Index spiked at 89.5.

But since that high water mark, the VIX hasn't ventured above 20 since December 2012. And so far, in the summer of 2014, it has hovered in the 11 - 13 range-some of the lowest readings it's notched since before the Financial Crisis. And as market volatility readings remain low, consumer confidence is soaring: June's Conference Board Consumer Confidence Index reached its highest level since January 2008.

So what's wrong with investors feeling confident about stocks, and why would something positive be a cause for concern? As long as it truly is confidence, then there's little to worry about. But if back-to-back years of positive growth and double-digit stock returns have led to investor complacency, that's where trouble can begin. While these years of plenty are certainly something to rejoice over, investing is a long-term commitment and requires planning ahead for the inevitable years of investment uncertainty.

It's anyone's guess if and when that shift may come. Even at five years old, today's bull market is only the fifth longest since 1928. So although history holds no promises when it comes to investing, there are precedents for longer-running bulls. The domestic economy is expected to shake off the doldrums after a brutal winter and unemployment is at its lowest level since September 2008. Europe is also on the road to its own recovery with several consecutive quarters of positive economic growth, and financial reforms underway in Japan seem to be having their intended positive impacts.

The key is to be prepared in advance of any end to plentiful investment days rather than trying to predict the timing of market downturns. A portfolio that is properly diversified today can be built to better withstand a variety of market scenarios, and that is what should truly build confidence in investing. In the end, no matter how broad markets perform, your own success is measured by your portfolio's ability to grow your hard-earned money.

All investments are subject to risks, including possible loss of principal. Past performance is not indicative of future results. Indices are unmanaged and not available for direct investment.

Source: The Fine Line Between Confidence And Complacency

Additional disclosure: The article has been written by Hartford Funds' Investment Team. Hartford Funds is not receiving compensation for it. Hartford Funds has no business relationship with any company whose stock is mentioned in this article.