Investors who missed the past year's rally can still get in at the next pullback—but it could be a long wait.
With the market soaring more than 70 percent off its March 2009 lows, those who have sat out the run are now left with the dilemma of how best to put their money to work: Wait for the market pullback, or get in now and not chance missing another leg higher.
Advisors are split sharply between the two camps but believe there is little reason to keep letting fear be an obstacle.
"If you're hoping for a pullback to get in at lower levels, then you're doing exactly that, you're hoping," says Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. "When you invest based on hope it usually doesn't go well."
Yet the words "pullback" and "correction" are two of the most common words from the mouths of market pros these days.
Every time technicians say the market is overheated, it seems only to go higher. An expected pullback during earnings season, much like that which accompanied the two previous reporting periods, has failed to materialize as well.
"If a pullback should come and gives you an opportunity to increase that exposure, that's great. But you can't hope for that pullback," Flam says. "What happens is you get that pullback and say, 'Oh no, we're going to go down,' and you don't actually buy."
Investors remain nervous despite the continually positive signs and the government's willingness to keep liquidity in the market.
Bond fund inflows continue to sharply outpace equity funds. In the week ending April 21, bond funds saw inflows of $3.3 billion compared to $2.1 billion for equities, according to Lipper data. For the first quarter of 2010, bonds saw $86 billion in flows to $33.1 billion for equities.
Cash on the sidelines in money market accounts has fallen lately and was at $2.88 trillion in the most recent data from the Investment Company Institute. The figure was close to $4 trillion before the market turnaround 13 months ago.
The figures reflect continued hesitation despite the market gains and likely indicative that many indeed are waiting for the market to get cheaper before they start deploying money again.
"If you're an individual trying to do it and you've been in cash, wait a little longer. The market's due for some kind of correction," says Kathy Boyle, president of Chapin Hill Advisors in New York. "I don't know if it's going to be 5 percent or 10 percent or 20 percent, but there's some kind of correction coming."
When opportunities do present, Boyle recommends a defensive strategy and, though she is a big advocate of exchange-traded funds, believes stock picking will be a better plan. For instance, instead of buying the SPDR Utilities ETF, she has bought some of Con-Edison .
"This is the right place at the wrong time," says Burt White, chief investment officer at LPL Financial in Boston. "Everything is coming together perfectly—economically, the Fed looks relatively dovish, earnings are great. Everything looks great. It's just the wrong time. The market looks a little overbought."
White advocates waiting for a pullback of about 5 percent then averaging into the market by buying at uniform levels at periodic points.
Those looking to deploy cash immediately should focus on on fixed income, he says, particularly on investment-grade corporate bonds and emerging market currencies.
"I would get very aggressive with bonds. I wouldn't get aggressive with equities," he says. "Equities have pulled ahead of their fundamentals. While bonds are doing well, they still have a way to go."
That disbelief that the economy and market are in synch is what bedevils some advisors who think investors are foolish for waiting any longer.
"There's a reason why there's still (nearly) three trillion in cash sitting on the sidelines. No one believes this recovery, it's the Rodney Dangerfield recovery," says Phil Orlando, chief equity strategist at Federated Investors in Pittsburgh. "We're up 81 percent from the bottom of the market 13 months ago and I've never seen so many unhappy people in my life."
Orlando sees the Standard & Poor's 500climbing to 1350 a year from now—a healthy 10 percent gain—with the benchmark 10-year Treasuryyield rising to as high as 5.50 percent, which would mean a drop in principal value for the note.
"Given that spectrum of investment opportunities, we still think that stocks are the only game in town," he says. "The regrettable part for some investors is they just missed an 80 percent rally. They've got to put their money in stocks."
Technology will be the best place for investors, Orlando says. Tech has been middle-of-the-pack among S&P gainers this year with a 6.4 percent rise against the broader index's 8.4 percent gain.
The important thing, he says, is for investors not to be afraid and to avoid waiting for a pullback that may not come anytime soon.
"I don't know that you can wait for a pullback, because there's so many non-believers sitting on the sidelines," he says. "As each marginal bear throws in the towel, the market grinds higher."