Dow hits record high 20,000! Can it go higher? Will the bottom drop out? Should you buy, sell, or hold? These are all good questions with no easy answers. That’s why it is important for investors to focus on their own situation and not their neighbors.
With the Dow Jones reaching 20,000 points for the first time ever and uncertainty remaining high, the question that lingers is whether it’s time to sell. Selling and capturing those gains sounds good, but you certainly wouldn’t want to miss out on additional opportunities if the Dow continues to rise. So what is an investor to do?
A Dangerous Game
For long-term investors the solution is to stay calm and stick to your plan! Trying to determine the timing of the market highs and lows is dangerous because there will always be reasons to get out of the market.
Take the 2008/2009 financial crisis, for example. On March 9, 2009 the Dow experienced its lowest close of the Great Recession at 6,547 points. At that time the economic future looked very uncertain. Now, just eight years later, the Dow has reached 20,000. During those eight years investors were given multiple reasons to take their money out of the market, but for those long-term investors that stayed true to their plan, they often saw solid gains.
This reinforces our oft-repeated mantra: A long-term approach to investing, combined with patience and calm nerves, gives you the greatest chance to build wealth.
What if I don’t have a Plan?
You can’t stick with a plan if you don’t have a plan. Developing an investment plan is extremely important to help you stay composed throughout your investing lifetime. Every investment plan needs to be personalized to your own individual short and long-term goals. Are you saving for retirement; a new home; or maybe a vacation in a couple of months?
The first step is to comprehend your financial situation and know how much you need to save to accomplish your goals. Once you know the amount, you need to determine how uncomfortable you might be if the market goes down. Remember, the higher the potential reward usually means the greater the volatility.
Our rule of thumb: Never invest money in the stock market that you will need within five years. It is important to have time on your side to recover from a potential down market.
If you have a plan, this may be the time to rebalance your portfolio. The Dow rising to 20,000 may have caused your portfolio to be too heavily exposed to equities. In this case, rebalance by selling stocks and reinvesting in a more conservative asset class. If you have a well thought out investment plan, it is important to keep calm and trust it, especially during times of fear and volatility.
How Easily We Forget
So, if you are concerned about events today, remember what we have gone through over the past eight years. We have experienced:
- U.S. Debt being downgraded (2011)
- Fiscal Cliff (2013) and the threat of a government shutdown
- Crimea and the standoff between Ukraine and Russia (2014)
- Greece defaulting to the International Monetary Fund (IMF) (2015)
- Oil Collapse (2015)
- Puerto Rico’s Default (2016)
- Brexit (2016)
Perhaps the freshest in our minds is the surprise election of Donald Trump to President of the United States. After an initial pre-market sell-off following the results of the election, the markets quickly fought back and were positive on Wednesday. Currently, we remain in what is being called the “Trump Rally” with the Dow hitting 20,000.
Every one of these events caused pullbacks in the market and immediate concern for what could happen next. Still, after each of these, the market recovered, stabilized, and continued to rise.
Hindsight is 20/20
It is always easier to look back and say “why didn’t I sell then?” or “if I would have just stayed invested a little longer...” The truth is no one knows where the market is headed. Historically speaking, over the long-term the stock market increases. But, not without a lot of ups and downs which may cause an investment portfolio to be negative over a short-term period.
Times of volatility, uncertainty, and downturns are inherent with investing. This is why it is so important to have an appropriately designed investment plan and to stay focused on that plan to achieve your long-term goals. Composure during these tough times has historically paid off!
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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