The stock market has broken another series of records.
On Wednesday the Dow Jones Industrial Average rose to 23,156, hitting a record high for intraday trading. The NASDAQ and S&P 500 also broke intraday trading records on Wednesday, pushing all three major benchmarks to yet another peak. This comes on the heels of the stock market's major benchmarks reaching all-time highs in September and again earlier this month.
Since early 2009 the stock market has had extraordinary and sustained growth. The Dow Jones Average broke its previous all-time high in early 2013, and values have climbed steadily since then. Each month seems to break new records. For individual investors this is more than a curiosity. People who have invested their retirement funds and nest eggs may want to know how to handle a record breaking market.
And the answer is deceptively simple: don't.
"The motivation to invest can't be the fact that markets are setting new records," said Greg McBride, chief financial analyst with Bankrate. "It has to be because putting money into the stock market is consistent with your long term financial goals and your risk tolerance."
"It honestly requires a serious gut check," he said. "If you're willing to leave your money in the market for a month or more, regardless of the ups and downs, then every day's a good day's to invest. But if you're looking to make a quick buck, then that's a major red flag."
The truth about a hot market is that it tells an individual investor almost nothing about what they should do with their money. Except for people who make a living investing in the stock market, which very few people should try to do, most investors only need to worry about the long haul. Investing your money is about letting it earn value over time, not about turning a hundred bucks into next month's rent.
So a smart investor needs to think about what the market will look like over time. In that context, most financial advisors say, the current value of the market doesn't matter all that much.
"Every time the market reaches a new high the question gets asked, and you reflect back on what would you have done in the previous high," said Roger Hobby, an executive vice president with Fidelity Investments. "If you're invested, and you've been invested, you've obviously participated in a very successful up market… Then you kind of stay the course, because your options are to either do that or market time, and market timing has not been proven to be very successful."
This, both Hobby and McBride agreed, is one of the biggest dangers with building an investment strategy around the current state of the market. It encourages you to start thinking less as a long term investor and more like a day trader. The more you structure investments around market highs, the more likely you are to respond to dips and other forms of market correction. You start moving money around based on what you saw most recently in the paper.
That might make sense for someone trying to cash out at the end of the day. For a portfolio that should accrue value over years or decades, though, it can spell disaster.
"The danger with chasing performance is that investors become enamored of a market that is setting new highs, only to bail at the first sign of trouble," said McBride. "The risk is that an inevitable pullback scares you out of the market. And it's not unusual, and is in fact quite normal, for markets to have a 10% pullback every year or so. If that 10% pullback is going to scare you out of the market, you've lost 10%."
"You are buying high and selling low," he added. "That's the opposite of what we want to do as investors."
Hobby called it the danger of emotional investing. People begin to structure their portfolios around excitement and fear, creating an almost rollercoaster-like attitude toward managing their money.
Instead, he suggested, ignore the stock market highs and lows altogether. Build your portfolio around goals, diversity and risk tolerance. Try to ensure the least risk possible to meet your goals for any given investment, without being any more conservative than necessary to mitigate that risk.
As far as the stock market itself, it will continue to go up. Then, it will go down. Then it will go back up again. Over the years the market will have many peaks and crashes. Trying to time your investments around those swings rarely has any tangible benefit… if for no other reason than that investors have no good mechanism for to judge that timing.
"You could be in a really great plan, and you could be appropriately allocated for your time frame, and you could go through a really rigorous process to assess your risk," Hobby said, "and then the market can have a big correction as we've seen over 2008-2009 and you can make a very emotional decision to just sort of abandon your plan and get out."
That's an emotional decision, not a rational one, he said.
Investors shouldn't jump in because the market looks hot, and they shouldn't spook just because it looks cold. Recall, after all, that everyone who fled the market in 2009 only would get that value back after four years.
Prices are high right now, but eventually they will go down as the market takes its inevitable dips. Those low prices, in turn, will eventually rebound. There's no way to tell when any of that will happen, only that over the long term the economy will grow and the stock market will trend generally up.
So invest wisely and build a portfolio based on your savings and your future.
And let the market worry about itself.
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