By Mark Murphy, Chief Investment Officer, Raffa Wealth Management
The US stock market index, the Dow Jones Industrial Average, hit the heralded milestone of 20,000 near the end of January. With the new record high many investors are asking what does it mean for the future of stocks and what should they do with their investments?
Our response to the milestone is, so what? While it is nice to see US stocks hitting new record highs as it means were seeing strong positive returns, a particular round number doesn’t really matter a whole lot.
Investors instead should remain focused and stay disciplined to their investment plans. Investors shouldn’t adjust their investment strategies based on a new stock market high. Looking to add more to US stock based on recent performance is chasing returns and pulling back from US stock, if not driven by an unbiased rebalancing policy, is letting emotions get in the way of your long term goals. Both are market timing and can be detrimental to a portfolio.
The stock market is continually factoring in new information to value companies and it reflects the collective wisdom of investors around the world. Even though the stock market has reached record highs it does not mean there is nowhere to go but down. After hitting a record high of 3,000 in late 1991 the Dow didn’t suffer another sustained decline until mid 1998.
In addition, putting significant weight behind the Dow is misguided as it’s an index tracking just 30 of the largest companies in the US making it possible for just a few stocks to have an outsize impact on the index. Thus it is not providing a full picture of the US stock market. We recommend tracking the S&P 500 or Russell 3000 for a broader view.
While it’s nice to see markets rise, it’s doubtful that an investor has reached the finish line because the market hit an arbitrary milestone. Investors need to remain focused on their long term goals and not get distracted by the day to day noise surrounding the markets. By maintaining a disciplined approach an investor greatly improves their chances for long term investing success.
Reposted from the Raffa Wealth Management Blog.
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