Is this rally fool's gold or the real thing?
That's the $4 trillion question. By some estimates, that's the amount of money investors have parked in cash, savings or other safe places until they are confident the market has regained its traction for the long term. Some clearly think this rally is for real, and money has begun to flow into the market again. Investors pulled nearly $40 billion from the safe haven of money market funds by the end of April, while stock and bond mutual funds gained $138 billion, according to the Investment Company Institute.
But that is a fraction of the money still on the sidelines, and not everyone is convinced by the market's recent rise.
"Obviously, it's not yet a stampede back to the market," said Glen Mather, chief executive officer of Lake Mary-based Entrust Administration Services Inc., an investment account processing firm. "But a lot of people are starting to feel like they aren't earning anything in these safe havens, so they need to put their money back to work."
So should I jump into this market?
The short answer is this: Swim at your own risk; and know what your risk tolerance is.
Even if this rally is indicative of a sustained recovery ahead, most experts agree there will still be gains, losses and additional volatility for an undetermined period.
"This market is on sale, and I agree that it is probably a good time to buy," said Gene Balliett, a financial planner and founder of Winter Park-based Balliett Financial Services. "But with this caveat: It's still a gamble on what's going to happen in the future. And anybody who says they know what's ahead is kidding, at best."
Experts say the degree to which you invest still depends on how close to retirement you are and how badly you need cash for current living expenses. Younger investors have more latitude because they have time to offset any losses. A well-diversified portfolio for people still decades from retirement can contain more than 90 percent in stocks and the rest in bonds and cash.
The picture would look markedly different for people at or near retirement. The most conservative mix for people retiring next year, for example, would be less than 30 percent in stocks, 62 percent in bonds and the rest in cash and other fixed-income investments, according to the Morningstar research firm.
I don't have much of an emergency cushion. Should I invest in stocks?
Overall, financial advisers still urge people to put a priority on building their emergency cash reserves to cover at least six months of living expenses. That is especially important for people who think their jobs may be in jeopardy.
With so much uncertainty, shouldn't investors wait until things are undeniably back to normal?
By then, you may have missed out on capturing the big returns and recouping much of what you lost last year. Plus, you risk having inflation eat away at what little returns you get on money markets and other safer investment vehicles.
What should investors do differently this time to make sure they don't get burned again in the stock market?
Don't be passive. Read as much as possible about any stock, bond or other investment you're considering. Test every source of information. Don't impulse-buy.
If you decide to use a financial adviser, shop around and compare their fees, biases and approaches to investment. Beware of scams. Look for red flags such as high-pressure sales tactics and unrealistic "too good to be true" guarantees. Look for caution flags such as conflicts of interest or excessive charges.
"We've certainly noticed that people are doing a lot more due diligence," said Neil Oehlstrom, a financial adviser for Edward Jones & Co. in Orlando. "They want to know what is going on. They're not willing to just sit back. And for a lot of people, it's going to take a whole lot to win back their confidence in this market after all the shenanigans that took place on Wall Street."
Remember the classic movie Jaws, when people wondered whether it would ever be safe to get back in the water? Investors burned by last year's stock market crash know how they felt. But now a historic Wall Street rally has propelled the market up about 30 percent from its 12-year low in early March. And investors who pulled hundreds of billions of dollars to the sidelines last year are wondering whether it's time to get back in. Here are some answers to investors' questions: