Don't Just Watch the Parade Go By

Count on it. For the next several years, the stock market belongs to the bulls. You're going to see periodic pullbacks, to be sure, but they'll be minor, transitory affairs, just enough to keep sideline money out of the market for as long as possible.

As in every bull market in the modern era, the average investor will miss much of the harvest to be had in this cycle. They've certainly been on the sidelines for the initial move: For the first nine months of 2009, investors pulled $8 billion more out of stock funds than they put in. And in the face of the best year in stocks since 2003, the data show that in early October the net redemption rate actually accelerated, with a net $5 billion redeemed.

Investor aversion to stocks is beyond bewildering, especially when stocks are compared with alternative investments. Tic-tac sized yields on cash barely beat the nonexistent yield generated from under-the-mattress investing. In the aftermath of the 1982 bear market and the 1987 crash, at least investors could hide out in cash and collect 9% and 7% yields, respectively. Now, fearful investors get slapped two different ways: They get to watch a major bull market march resolutely higher, and they get paid next to nothing while they watch.

Treasury bonds are even worse than cash because of the inordinate principal risk that owners of Treasuries have to absorb. Paltry yields of 3% and 4% for long-term Treasuries aren't high enough to compensate owners for the risk of inflation. Rates only have to go up modestly for the decline in value of long-term Treasuries to reach double-digits.

It's the stuff of a big bull market in stocks: The crowd simply doesn't see it until after the fact.

To capture the upside that's coming, you've got to recognize the opportunity. You can do it by taking a step back and looking at the big picture. Start with this: 200 years of history that says big bull markets always follow big bear markets. Check your charts, if you must, but you'll not find a single exception to this rule.

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At the time of publication, Alsin was long GE and GS.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.