It looks like January has broken the pattern of 20 consecutive months in which investors pulled more money out of U.S.-stock mutual funds than they put in. So we ask: Is now the time to dive into the stock market?

The following answers are from The Experts—an exclusive group of industry and thought leaders assembled by The Wall Street Journal to engage in in-depth online discussions of topics covered in the print Report.


Charles Rotblut : Yes, if It's for the Long Term

The answer is yes for anyone who is investing money for the long term. Bonds paying 2% or 3% are simply not going to build your wealth or preserve your ability to purchase future goods and services. Plus, from a valuation standpoint, stocks look cheap relative to bonds.

None of this is to say stocks will be higher next week or next month. Every market forecaster uses a cracked crystal ball and no one can consistently predict the short-term direction of stock prices with accuracy. What I can tell you, however, is that the odds of stocks being worth more 15 or 20 years from now are pretty good. And if you are investing for the long term, then your focus should be on long-term wealth creation, not short-term market fluctuations.


Tom Brakke : The Real Test Will Come When the Fed's Hand Is Forced

As phrased, I would say no. But the reason for that response is that investors should never be looking for a "time to dive into the stock market." Whether or not to invest in the market is a function of many things, most importantly an investor's situation and current risk exposure. Jumping in and out of the market pool is almost always counterproductive behavior.

The recent rush of money into equity mutual funds may or may not be an indicator of anything, especially in the wake of the nervousness over the "fiscal cliff" at the end of last year and seasonal effects that can be pronounced at the start of a new year. But the broader question is whether you should follow the crowd or run in the opposite direction. Most research shows that mutual-fund flows are contrary indicators. A case in point: Equity funds have had persistent outflows since 2009, even as the market rose more than 100%.

But are equities a good value now? That's extremely hard to tell given the actions by the Federal Reserve and other central banks, which have distorted asset prices in order to encourage investors to take risks. (Just because they think you should doesn't mean that you should.) The great benefit to stocks now is that they are relatively attractive versus most types of bonds, but the real test will come when the Fed's hand is forced. Despite statements to the contrary, neither the Fed nor investment experts have any idea when that might be.

Tom Brakke, CFA (@researchpuzzler), is a consultant, writer, and investment adviser who specializes in the analysis of investment decision making and the communication of investment ideas.

Burton Malkiel: While Timing the Market Is a Terrible Technique, Equities Are Now Attractive Relative to Bonds

No one can consistently time the market, and certainly following public fund flows in and out of equity funds is a terrible timing technique. But we do know that even after their recent run-up equities are attractive relative to bonds, and starting a program of dollar-cost averaging into equities is likely to provide reasonable long run rates of return.

Dr. Burton G. Malkiel, the Chemical Bank Chairman's Professor of Economics, Emeritus, and Senior Economist at Princeton University, is the author of the widely read investment book "A Random Walk Down Wall Street."

Scott Adams : For My Sake, Buy, Buy, Buy!

Should you dive into the stock market? Absolutely. And if you have no money to invest, I recommend getting cash advances against your credit cards. And stop eating, entertaining, and saving for your kids' educations. Sell your blood if you need to. Put all of that extra money in the stock market. My reasoning is simple: I own stocks and I want you to drive up their prices.

I have a feeling that the smart money is already in the market and those folks are crouching like sprinters, waiting for any sign of bad news. Meanwhile, we are way overdue for some sort of b------- crisis like the Year 2000 bug, or California going into a death spiral, or an artificial debt limit, or North Korea testing a satellite-based death-ray. When the new fake crisis happens, sometime within the next month, the market will pull back 10%. That's when I expect to go into a panic and start selling my stocks at a loss.

What the stock market needs—and what I need—is for lots of people who know absolutely nothing about investing to pile into the market and buy broad market ETFs. Then I need those people to poke out their own eyes and caulk their ear holes so they don't accidentally encounter any news. I don't think that is too much to ask.


Rick Ferri : Don't Buy if You're an Undisciplined, Short-Term Investor

History shows a distinct behavioral pattern by individual investors. They exit the stock market en masse after a heart-wrenching drop like we had in 2008 and continue selling for a few years thereafter. The flows reverse once the market recovers and produces a respectable five-year gain. This pattern can be traced all the way back to the 1800s.

We're at the inflection point now in the market. The S&P 500 has had a positive total return over the past five years, so it's no surprise that investors are beginning to come back to stocks. It doesn't hurt that stock dividends are yielding over 2.2%, which is almost triple the five-year Treasury bond yield and a quantum leap over short-term money-market rates. Nor does it hurt that the Federal Reserve has vowed to keep interest rates very low for the foreseeable future. This enhances stock valuations.

The question being asked by investors today is whether now is a good time to dive into stocks. I have reservations about answering this question. First, it's never a good time to dive into any investment based on short-term performance. Second, the question itself implies a flawed investment strategy.

If an investor jumped out of stocks during the financial crises after prices had gone down, and now is considering jumping back in after prices have recovered and exceeded the precrisis high, I can't imagine that this investor has done any long-range investment planning.

Trying to time the markets just doesn't make sense, even among the pros. Recent research shows professional investors have only a 48% accuracy rate. Trend following doesn't help either. There is no data supporting the notion that past performance is an indication of future performance. The whole idea is flawed from the start.

A much better solution is to have a realistic philosophy and a practical plan. A philosophy might be that the markets aren't predictable and that it's imprudent to try to beat them. A strategy based on this philosophy might be to hold the same fixed allocation in stocks, regardless of what the market does. This would have meant buying into the market during the financial crisis when prices were low and selling some after the market recovered. That's a realistic philosophy and a practical plan.

To answer the question, "Is it a good time to dive into stocks?"—I have this to offer: Yes, it is a good time for a disciplined investor who has a long-term plan because owning a fixed allocation to stocks based on your needs is always a good way to invest. No, it isn't a good time for an undisciplined investor who doesn't have a plan to own stocks because that will just lead to capitulation again during the next bear market, and that is not a good way to invest.


Larry Zimpleman: Now Could Be the Time to Add a Little Equity Exposure

The average investor should always be cautious about making large, radical adjustments to their asset allocations. History and experience shows that is seldom a winning strategy. Rather, the average investor should maintain a well-diversified strategy (as an example, something like 60% equities and 40% fixed income for a middle-age investor) and then might make asset-allocation changes around the edges. For example, given the likelihood of continuing low interest rates, it might be an opportunity to increase the equity exposure a bit (say, to 65% or 70%) and reduce your fixed-income exposure, reflecting a higher probability of interest rates increasing over the next two-to-three years.


Eleanor Blayney : Don't Let Fear or Greed Dictate Your Financial Management

When to invest depends far more on individual circumstances, than on money flows or the latest direction of the stock market. It is primarily a financial-planning question: Do you have an emergency fund set up? Do you have the right insurance coverages in place? Have you articulated long-term goals? What are your large cash-flow needs in the next three-to-seven years? The answers to these questions, discussed with a qualified professional such as CFP® professional, should determine your investment planning (when, where, and how much). You need to ask yourself, "Where am I going long term?" as opposed to "Where is the market going short term?"

The phrase "dive into the stock market" is unfortunately apt to a lot of consumers whose financial behavior is dictated primarily by fear or greed. A lot of consumers have been waiting since 2008 or 2009 to "get back in," when in reality they should have never been out.


Meir Statman: Is Now the Time to Buy Stocks? Ask Me In Four Years.

We know now, with clear hindsight, that the time to dive into the stock market was March 2009, almost four years ago. We'll know in four years, with equally clear hindsight, whether January 2013 has been the time to dive into the stock market. But I don't know that now, in clear foresight, and I doubt that those who claim to know are guided by anything more than hindsight bias, the perception that they can see the future with clear foresight when, in truth, clarity is reserved to hindsight alone. The old advice is still good advice—don't try to time the market.

Are you one who has had clear enough foresight to pull out of the stock market in October 2007? Good for you. Did you remember to get back in in March 2009? Or are you waiting for the stock market to plunge again to its level in March 2009 before you dive in? A better investment strategy is to hold a well-balanced portfolio and leave it to float up and down with the market.

Suppose that you're considering diving into the stock market now. You're probably afraid of the regret you'll feel if the stock market were to plunge as soon as you dive into it. Dollar-cost-averaging isn't a rational strategy for mitigating risk, but it is a normal smart strategy for mitigating regret while you enter the market slowly, toe by toe. Divide the money destined for stocks into 10 equal segments and invest each segment on a pre-specified day of each of the next 10 months. If the market plunges as soon as you invest the first segment you'll assuage your regret by the knowledge that you can buy the second segment at a lower price.

It might seem surprising that individual investors have taken so long to notice that the stock market has climbed a long way up from its bottom in March 2009. I've found in my research that investors tend to extrapolate into the future returns from the preceding six or 12 months. So what took them so long this time? The answer is likely to be found in the vividness of the crash of late 2008 and early 2009, obscuring the rise in the stock market that followed, and in the fear induced by the crash. Examining the sentiment of members of the American Association of Individual Investors (AAII) I found that in February 2009 they expected relatively low future returns. I've also found that VIX, the risk index, was relatively high that month. This is typical of times of fear, when people expect both low returns and high risk. In times of exuberance, such as the end of 2009, they expected high returns and low risk.


Christian Magoon : Yes, and Bonds May Now Be Riskier than Equities

Strong retail mutual fund flows have traditionally been an indicator that underperformance is more likely than not. Why is this? Fear causes investors to miss attractive entry points in market downturns, while greed motivates investors to buy more as prices reach lofty levels. Thus when a strong mutual-fund flow trend develops, it usually is a sign of fear or greed motivating investors.

The question remains, however, is now the time to dive in the stock market? The answer, despite the obvious turnaround in retail mutual-fund flows, is a qualified yes. The stark reality for most investors is that they are likely to have too much bond exposure and not enough equity exposure today. Despite the equity markets returning to five-year highs, investors have channeled the majority of new investments into bond funds over the past few years. Unfortunately, this was being done while the equity markets were rallying significantly and bond funds distributed meager streams of income. Most investors can't afford their current allocation to bonds versus equities if they expect to meet retirement goals. In fact, it could even be argued that given today's low interest rates and overly popular bond market, the risk inherent in bonds may be much greater than equities.

While no one knows the direction of the next 500-point move in equities, one conclusion is certain. Most investors will only be able to fund their retirements through a portfolio with a healthy exposure to equities. While the current timing of that exposure for investors has missed the bounce back in equity prices, investors need to be more concerned about maximizing their length of time in the equity markets, not timing them.


Michael Kitces on Christian Magoon's Post: A Rational Case for Buying Bonds

While I agree with Christian Magoon's earlier statement that in the long run, most investors will need some exposure to the equity risk premium and the higher returns associated with it, I'm not certain I can entirely agree that "the risk inherent in bonds may be much greater than equities."

The key issue here is that a real bear market in bonds—where rates rise, potentially quite precipitously—isn't exactly a positive for stocks or the economy either. If rates were to quickly unwind, and investors could suddenly get relatively secure bonds paying 5% to 6% again, how much more money would flow out of stocks into the relative safety of bonds with a decent return again? Yes, the transition from today's rates to higher rates would entail bond losses, but the point is that it could lead to stock losses, too.

And of course, that is before we recognize the economic ramifications of rising rates, which is generally "not good" for the economy. After all, the whole point of Fed policy is to keep rates low to stimulate the economy. If rates rise in a bond bear market, that is a headwind for the economy as well, which is also a headwind for equities.

In other words, simply put, saying that bonds are at elevated risk for a bear market implies that stocks must be, as well. And stock bear markets can hurt, too, with an average decline of 37% for the past century or so.

That doesn't mean it's necessarily a wise strategy to try to time this perfectly in the short term—no one knows when the next stock bear market will unfold, nor the next bond bear market. After all, many people have been calling for the latter for several years already, and rates just continue to trend sideways or lower, not up. And if you're going to be invested for a very long period, dollar-cost averaging into this market slowly and holding it for a long time can smooth out much of the pain.

Nonetheless, the bottom line is that, especially for investors who might be defensive already, remaining invested in bonds at today's rates may be entirely rational after all. Certainly, most would reasonably argue those bonds should be a bit shorter term, so as not to increase exposure to the pain of a bond bear market. But it's hard for me to see the riskiness of bonds doesn't also represent some riskiness in stocks, too, especially for those not comfortable in timing shorter term tactical shifts.

Michael Kitces is the Director of Research for Pinnacle Advisory Group, and publisher of the financial-planning industry blog Nerd's Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.

George Papadopoulos : Who Knows? There Is No Stock-Market Crystal Ball.

When I first got into this business I noticed the email signature line of a colleague had this: "The best time to get into the market was 30 years ago, second best is now." This stayed with me. I flatly refuse to answer this question as the likelihood is quite high I will look like a fool! Instead, I always respond with something like this: "You know, my crystal ball stopped working years ago. Nobody knows the future and if someone tells you so, you must run in the opposite direction! But I can safely make this prediction every time: "The market will fluctuate" and I smile. I strongly believe it is highly recommended for individuals to have a financial plan in place that includes a low-cost diversified investment portfolio that is rebalanced regularly!

George Papadopoulos (@feeonlyplanner) is founder of the eponymous fee-only wealth-management firm based in Novi, Mich., serving affluent individuals and families.

Gus Sauter: If Investors Wait for Calm in the Stock Market, They Will Wait Forever

Even though there is a veritable mountain of cash on the sidelines, we'll have to wait to see if the recent investment into the stock market becomes a trend. It's certainly encouraging to see investors re-enter the market, but not because it heralds the start of a new bull market. In fact, the U.S. stock market, as measured by the CRSP Total Market Index, is up in each of the past four years, for a cumulative gain of 78%, as follows:

2009: 28.9%

2010: 17.9%

2011: 0.7%

2012: 16.2%

2009-2012: 77.8%

Hopefully, investors that have a long time horizon are starting to believe that it is safe to go back in the water. Otherwise, it will be very difficult for them to reach their long-term financial goals. It is said that the market climbs a wall of worry, and the performance above certainly reinforces that. There is a very good lesson in this. The reason the stock market has historically provided superior returns is because of its volatility and uncertainty, otherwise known as risk. I have no idea whether the market will extend the string of stellar returns into 2013, but I strongly believe that investors that have a long time horizon will be well served by committing to an appropriate strategic equity allocation, with the realization that there will be volatility and it may be a scary ride at times. Investors that are waiting for the market volatility to calm down and for more certainty will be waiting for the rest of their lives.

George U. "Gus" Sauter is a senior consultant to Vanguard. From 2003 through 2012, Mr. Sauter served as Vanguard's chief investment officer.

Michelle Perry Higgins : Take a Step Back and Have a Long-Term Vision for Buying Stocks

We should not necessarily assume that just because the trend has been to buy into the stock market that it would be the right move, in general. For many investors, just the opposite could be true. The best time to buy is generally when prices are low and heading up, but we have been at near record highs on the Dow for months now. Is it really the right time to jump into the market?

Let's take a step back for just a moment. 2012 was a year full of worries, from the European sovereign debt issues to the fiscal cliff. With all of this staring them in the face, many investors chose to sit on the sidelines and hold on to their cash. Thankfully, the year is behind us and we were able to avoid significant calamity. The major indexes, like the Dow, S&P 500 and EAFE, all ended the year with respectable returns. It clearly doesn't hurt investor confidence to see the S&P 500 close above 1500 on Jan. 25, 2013, which we haven't seen in over five years.

But before you "dive into the stock market" be sure to take the time to review your asset allocation. Ask yourself if you have a clear vision of what your asset-allocation goal is for your portfolio versus where you are today. Your asset allocation is derived by determining your time horizon, liquidity needs, tax impact, risk tolerance and economic conditions, both domestically and globally. The equity exposure in your portfolio, or as I call it, the "offensive side" of your portfolio, should have a long-term time horizon. In my practice, that is seven years or more. This isn't money you will use for emergency reserves, paying for your child's college expenses this year or a down payment on a home next year. These are longer duration funds. The stock market and Washington lawmakers will continue to be unpredictable. This is why staying focused on the long term with equity dollars is usually a better choice.


Frank Holmes: Prepare to Buy on Likely Down Days in the Market Ahead

The S&P 500 Index experienced the best January in more than two decades, and as the Stock Trader's Almanac has said, "As the S&P 500 goes in January, so goes the year." I believe the market has climbed higher for two reasons: 1) Central banks around the world have indicated that they are committed to continuing the synchronized global easing cycle which began in August 2011, and 2) Many world-wide uncertainties are behind us. In the U.S., President Barack Obama begins his second term. In China, the new leadership is starting to ramp up its infrastructure projects and reform certain government policies to help improve its residents' standard of living. And the European Central Bank is resolute in sustaining the euro.

Now, looking ahead, there are plenty of positive signs for equity markets. U.S. business and households have been deleveraging. Inflation is in check across the developed G-7 countries, even as central bank balance sheets climb higher. The housing market in the U.S. is improving. Prospective home buyer activity has picked up considerably, and new-home sales have historically tracked this trend.

Developing markets continue to be an area of strength as well. Compared with developed markets, emerging countries continue to experience solid growth and have low government debt as a percentage of GDP.

With that said, I like to manage investors' expectations, especially when it comes to anticipating potential downside volatility. After New Year's enthusiasm toward stocks wears off, I expect the debate over the debt ceiling will cause some fearful selling. However, I would challenge investors to see down days as buying opportunities.


Terrance Odean : Individual Investors Are Poor Stock Market Timers

Clearly a month ago would have been a fine time to dive into the stock market. This may also be a good time, or not. My crystal ball is a bit cloudy. What I do know is that, on average, individual investors are poor market timers. Most people are better off taking a long-term buy-and-hold approach to investments. Empirically, it has been possible to improve returns by overweighting asset classes at low points (e.g., when dividend yields are below historical averages) and underweighting at high points. However, individuals who time the market tend to sell after drops and buy after rallies. Thus, instead of improving on a buy-and-hold strategy, they detract from it. So, yes, market timing is possible; nevertheless, most people would be better off not trying to do it.


Matt Hougan : Investors Haven't Been Avoiding Equities. They've Just Been Choosing a Different Way to Get There.

I'll say two things.

First, the obvious answer is "no." The time to dive into the stock market was in 2009, when everyone else was pulling money out. The S&P 500 is already up more than 100% from the Devil Low of 666 back in March 2009. The time to buy was then!

Hindsight, of course, is always 20-20. But the scariest stat in finance is the gap between the average performance of mutual funds on paper and the average performance of actual investors in those mutual funds. A famous 2007 study by Friesen and Sapp pointed out that average mutual-fund investors trailed their chosen funds by 1.56% per year, because they bought and sold at the wrong times.

But I'm not saying "sit this one out." If you haven't been investing for the past few years, there's no time like the present, but stay invested and don't get sucked into market timing.

The second thing to note: investors haven't been avoiding equities until now. They've just been choosing a different way to get there.

In 2012, investors plowed more than $120 billion into equity ETFs, even as they pulled more than $100 billion out of equity mutual funds. Read that again: Net-net, 2012 actually had positive investor inflows into equity funds! It's just that the money went into cheaper, more tax-efficient, indexed ETFs, rather than high-cost traditional funds. That's just smarter money.


Christian Magoon on Michael Kitces's Response: Painting a Darker Picture of Bonds

While this question wasn't the focus of my original post, it appears to be worthy of more attention. Michael Kitces, a fellow member of "The Experts," disagreed with my belief that a case can be made for bonds to be more risky than stocks today. Michael's friendly challenge made some solid points and I wanted to respond with a few as well.

From a macro standpoint, I believe there is no doubt a case can be made for bonds being more risky than stocks today. Whether or not that case turns into reality is another issue altogether. However, I believe there is no doubt that the "bond specific" risks outlined below paint a picture that is becoming darker for bonds.

Bonds are:

•In the midst of a 30-year bull market after completing a 35-year bear market.

•Delivering yields in real terms that are at or near an all-time low.

•In a finite period of artificially low interest rates.

•Completing a streak of record-setting retail fund flows versus stock funds (i.e. 2012 flows: $297 billion vs. $13 billion).

•Going to be challenged, from a yield standpoint, to maintain purchasing power versus inflation.

Bear Markets: Bonds And Stocks Move Together?

"In other words, simply put, saying that bonds are at elevated risk for a bear market implies that stocks must be, as well," is a point made by Michael Kitces in his response that I want to address. I don't agree with his conclusion, although I concede it could happen. I believe a dual (bond and stock) bear market is very unlikely given each market's uncorrelated past behavior. For a chart that shows that the two markets' 10-year correlation to each other is actually negative, follow this link to Financial Planning Magazine.

To conclude, I believe a case can be made for bonds being riskier than stocks today. While that may be unpopular in the midst of a 30-year bond bull market and an all-too-recent bear market in stocks, caution is still prudent. Bonds aren't the ultimate "safe haven" some paint them to be. They are simply one type of income investment that is subject to risks that will ebb and flow over time. And for today, it appears the risks to the average bond investor are considerable.


Rick Ferri: Splitting the Difference Between Christian Magoon and Michael Kitces

I'm splitting the difference with Christian Magoon and Michael Kitces on whether bonds may be more risky than stocks at this point.

Christian is correct to point out that very low interest rates cause bond prices to be more volatile than if they were higher at a high yield. This is a product of bond math. As interest rates fall, duration increases and this means more risk. The longest-term bond funds have extreme volatility. The Vanguard Extended Duration Treasury ETF (EDV) is a portfolio of long-term extended-duration zero-coupon U.S. Treasury securities. The fund is primarily intended for institutional investors with extremely long-term liabilities—20 years or more.

You can see by the table below how sensitive this fund is even for small interest-rate movements. When rates rise just a little, as in 2009, long-duration bonds can be more risky than stocks, as Christian points out.

Recent Annual Total Return by NAV for Vanguard Extended Duration Treasury ETF:

2012: 3.18%

2011: 55.81%

2010: 10.27%

2009: -36.66%

2008: 55.40%

However, individual investors shouldn't be buying long-duration bond funds. They don't provide the principal protection of short- to intermediate-term bonds. One fund that is popular with individual investors is the Vanguard Total Bond Market ETF (BND). It invests in more than 3,000 bonds representative of the broad, U.S. investment-grade market. The duration of BND has been about five years, which is about one-fifth the duration of EDV. Notice the difference in results.

Recent Annual Total Return by NAV for Vanguard Total Bond Market ETF:

2012: 4.04%

2011: 7.71%

2010: 6.51%

2009: 6.03%

2008: 5.18%

BND has a yield of about 1.7% and a duration of about five years. If interest rates rise by 1 percentage point suddenly, then the NAV of BND will fall by about 5%. It will take a couple of years for the reinvestment of interest to put investors back in the black. Contrast that with EDV. It has no yield because the fund is composed of zero-coupon bonds and has a duration of 26 years. If interest rates rise by 1 percentage point, the NAV of EDV will fall by 26% and probably more.

If you notice, both funds did well in 2008. That's because when the stock market fell, interests rates also fell during that period. This is the point that Michael is making. However, correlations are dynamic, not static. Those of us who were around in the late 1970s know full well that the correlations between bonds and stocks can become positive. Stocks fell sharply along with bonds as interest rates rose in the late 1970s and early 1980s.

My view is that both Christian and Michael are right about some things and wrong about others. Christian is correct that there is more risk in long-term bonds now that rates are low but he is wrong to assume that individual investors will suffer greatly because they tend to hold short- to intermediate-term bond funds. Michael is correct to say that interest rates have fallen over the past 14 years when the economy slowed and stocks declined. However, correlations are uncertain and may flip again. It's entirely plausible that we may see a bear market in bonds and stocks at the same time, given mounting government debt, a slowing economy from belt tightening, and higher individual taxes.
