Milestones attract attention. It’s in our nature to notice remarkable occasions, such as an important birthday or a team’s winning streak. If you’ve been tracking the stock market lately, you know the Dow Jones reached its own milestone: 20,000. The index had a brush with the mark in late December and finally broke through on January 25. Now that it has hit 20,000—what does that mean and what should you do?
I’ve heard several questions from clients recently related to the Dow. Some are wondering if now is the best time to buy stock funds, while others are contemplating selling them. The truth is, when it comes to making decisions for your portfolio, the Dow reaching 20,000 is just a number. However, we can take advantage of the moment to highlight two circumstances clients often contemplate.
Signal to Move Off the Sidelines?
Market rallies often inspire optimism. If you add the buzz of the Dow’s milestone to this current rally, you can see why investors might get caught up. For those with portfolios sitting in cash after the last big drop, this may seem like the signal to jump back in with both feet. Some investors have even been holding tight in money markets since the 2008 financial crisis, waiting for the right time to buy back in.
But timing the market simply doesn’t work. Rather than guessing when it’s the right time to move cash into equities in one fell swoop, consider a dollar cost averaging approach. It works like this: You consistently invest a fixed amount regardless of the current fund price—for or example, $100 on the 15th of each month. If the fund’s share price is lower that month, you will purchase more shares. If it’s higher the next month, the same $100 buys fewer shares. This method lets you make good use of market lows, giving you more shares to take advantage of future price growth. Furthermore, it helps reduce speculation about when to buy.
Often investors dollar cost average by automatically investing from their bank accounts, but you can also move assets from one fund to another. You can do this by automatic exchange from your money market fund to slowly re-enter the market and diversify your portfolio. If you’ve been hesitantly sitting on the sidelines in cash, consider this option.
Call to Cash Out?
On the flip side, other investors see the Dow’s 20,000 mark as a reason for caution and are reluctant to stay invested. They’re concerned that the market is artificially high and anticipate an inevitable fall.
Again, it’s a time we see investors’ emotions drive decisions. History reminds us that markets go up and down and corrections are part of it. That’s why a diversified portfolio—typically a mix of stock, bond and money market funds—is so important. For example, if your investments only include equity funds, a drop in the stock market might be all the more daunting. This can be especially true if you’re approaching retirement and don’t have time to recover from a decline.
Diversification offers a better approach because you spread your investments across asset types that react differently to market conditions. The idea is that a gain in one area offsets a decline in another.
The Bottom Line of the High-Water Mark
While the Dow hitting a new high might get its share of buzz, it shouldn’t be the catalyst for drastic changes to your portfolio. We advocate relying on an overall investment plan that reflects the time you have to invest and your comfort for risk.
If you haven’t taken this step or have questions about how current market conditions may impact you personally, contact us for help.
Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.
Diversification does not assure a profit nor does it protect against loss of principal.