Three Reasons to Get Out of the Stock Market Now!

In the past year, the S&P 500 has increased more than 42%. My advice for most investors is they should dump all their stocks, but not for the reasons you may believe.

For all I know, the S&P 500 will increase another 42% in the next year ... or it may tank like it did in 2008. I don't have a clue. Neither does anyone else, but they like to pretend they do.

That brings me to my three reasons why you should consider having no exposure to stocks in your portfolio.

Reason No. 1: You believe someone can tell you how the markets are going to perform.

They can't. They don't know. Markets are random and efficient. Investors who follow "market experts" usually end up buying high and selling low.

Raise your hand if your broker or adviser told you to dump your stocks prior to the market crash of 2008. If you were fully invested in stocks, you lost 40% or more of your portfolio value.

Now tell me if your broker or adviser told you to jump back into the markets in early 2009. If not, you missed out on a 40% increase in the value of your stocks.

Clearly, your broker couldn't call the worst crash in fifty years or one of the fastest market recoveries in decades. Yet you are still relying on him to try to figure out the direction of the markets. You are going to get clobbered again.

Sell your stocks.

Reason No. 2: You will achieve higher returns in bonds.

We don't have to guess how the average equity investor has fared over the past 20 years. According to a study by the research firm Dalbar, for the 20-year period ending December 31, 2009, equity fund investors averaged 3.17%.

What if, instead of jumping in and out of the latest hot stock mutual funds, you just bought the Vanguard Total Bond Market Index Fund -- Investor Shares (VBMFX). The 10-year return of that fund was 5.98%. Since its inception in December 1986, it has returned 6.83% annualized.

Everyone will tell you the long-term returns for stocks are higher than the long term returns for bonds. They are right.

What they won't tell you is that the average stock fund investor is only getting a fraction of these market returns, because many in the securities industry continue to give advice that ensures investors won't capture returns that are theirs for the taking.

Since most of you will continue to rely on a system that clearly is dysfunctional, consider switching your portfolio to a low-cost, short- or intermediate-term (average maturity of seven years or less), bond index fund.

Here's an added benefit: You'll sleep better at night.

Reason No. 3: You will lose your shirt picking individual stocks.

I can't think of any reason to hold individual stocks, but I know I won't convince most of you that this is a terrible idea. There is so much misinformation on this subject, it is hard to know where to start. Here's some data you should consider:

A. The expected return of an individual stock is about the same as the benchmark index to which it belongs. For example, the expected return of a stock in the S&P 500 index is about the same as the return of the index. But here's the catch: The risk of holding an individual stock is significantly higher than holding the index because of risks unique to that stock. This is known as idiosyncratic risk. By holding individual stocks, you are taking more risk for the same expected return. Bad choice.

B. Many investors believe in doing their research (or relying on the research of others), before buying individual stocks. This makes sense, because it works in most other areas of human endeavor. Unfortunately, it doesn't work with stocks. Ask shareholders in Lehman Brothers, Washington Mutual, Worldcom, Enron and General Motors.

C. Great companies can be poor investments. Here's the sad reality. Even if you could identify great companies, they are unlikely to beat the returns of the comparable index. One study showed that wonderful companies like Berkshire Hathaway, Home Depot, Dell and Johnson & Johnson failed to equal (or even come close to) the returns of the S&P 500 index for the five year period from October 1, 2002, to September 30, 2007.

Most investors will not be persuaded by this data. Egged on by their brokers, they believe they are the exception. They cling to the hope they can find the next Microsoft (MSFT) and make a killing. Those investors would be far better advised to sell all their stocks now.

There are many other reasons why most investors would be better off not holding stocks, but if these don't convince you, those won't either.