On June 1, the Dow Jones Industrial Average hit a new record high, closing at 21,144. The broad market S&P 500 and the tech-focused NASDAQ did, too.
There are two ways to react to this news, and both are dangerously wrong.
One is to crow in anticipation of ever-higher stock prices. The historical data doesn’t back you up here. A 10% decline, what traders consider a “correction,” is a common experience going back decades.
If you take the position that stocks can only go in one direction — up — you will be sorely tested when a correction comes around. There’s no reason to believe that the past will not repeat or that reality has been somehow suspended.
The other is to conclude that stocks are doomed to crash and burn, taking down everyone who owns them and the economy with it.
As the billionaire investment icon Warren Buffett explained it in Fortune, stocks really are the better long term investment compared to its alternative, bonds, and the also-rans of the last few decades, such as gold, cash and home values.
The reason is productivity. Businesses, farms and real estate grow your cash relative to inflation while most other investments just don’t. And beating inflation is the entire point of investing at all.
So how should you manage the news that stocks are hitting new highs? With a shrug, if possible.
As investors often put it, stocks climb a wall of worry. It’s not surprising that all-time highs fall away on a regular basis because that’s what happens in a bull market. Every new high erases the old one.
Yes, stocks can go through flat periods, known as bear markets. But they don’t last nearly as long as bull markets. Plus, nobody can accurately predict the beginning or the ends of either type of market in any case.
The way to offset the risk of stock investing is to own a portfolio of investments. If you are young and have along time to invest, that portfolio should be mostly stocks. You can handle a downturn and should even relish it.
In a bear market, stock prices fall or stay even for months and months. If you are young and putting in cash periodically, say from a paycheck, a bear market is an extended sale. Take advantage.
If you are older, the prospect of a sharp decline in stock values can be worrisome. But ask yourself, do you need to liquidate your entire portfolio in a month, or next week?
Almost certainly not. In fact, most older investors should be projecting their needs out well into retirement, which for many of us could last decades. That means owning some stocks well into retirement, or in order to hold off inflation.
Getting the right balance of stocks and bonds is the key to maintaining growth in all markets, bull or bear. Lower your costs, rebalance and relax. The headlines tomorrow won’t matter, so long as you keep a clear perspective.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.