The market has been on a torrid pace since it bottomed out last year. Rarely will you ever see a time where growth is as fast as it has been during the last year. After bottoming in May of 2009, the market has been climbing, with the Dow going from a low of 6500 to a recent high of over 11,100 in just under a year. The picture on the cover of Barrons this week was of a bear glued to the windshield of a bus driven by a bull, with the marquee for the bus reading “12000” as the destination. If the market moves up just another 15% or so, it will move past the old record high.
During the fall from about October of 2008 through May of 2009, many watched as their fortunes decayed. Many who were looking to retire in the next few years decided that they would need to continue to work for a few more years. Some bought in at various points during the fall, expecting it to be the bottom, only seeing stocks start to fall afresh. I’ve no doubt that some decided to sell everything in despair just as the market was reaching the bottom. (It has often been seen that the crowd tends to buy at tops and sell at bottoms, hence the popularity of contrarian investing.)
It is therefore amazing that in a short year the markets have regained most of their former value. Of course some stocks have not come back and may never do so, but mutual funds that hold large baskets of stocks should be about where they were.
Now, having come up so far so fast, it can be expected that the market will take a breather, falling back a bit. Events such as flare-ups in the Middle East, Greece’s (and Europe’s in general) monetary problems, and talk about raising interest rates to quench inflation are also indicating that the market may be ready to pull back a bit. Based on this scenario, the actions that should be taken are as follows:
1) If one will need capital in the next few years, for example for retirement, it would be a good time to pull what will be needed over then next 5-10 years out and put it in fixed-income securities and/or cash.
2) If one is still saving and growing wealth, infusions of cash into the market should continue, but it might be wise to continue to stockpile cash for a little while. Wait for a pullback in the stock(s) of interest to invest. Note that it would not be a good idea to just sell securities outright if you still have a long time horizon unless the companies themselves are changing, (see the earlier post on “when to sell”) or a position has grown larger than one is comfortable with. These fluctuations will mean nothing in 20 years, and you could move a big move upwards if you try to time the market.
Note that while it is easy to see that the market may be running out of steam, it may go on for quite a bit longer than one would expect. It is therefore important to continue to invest – just maybe with less zeal than when the market looked cheap. Having interest rates so low may also add more life to the market than expected. There is a saying to not “Fight the Fed.” While they will have to raise rates if inflation picks up, they may also push the market higher in the mean time if banks actually start lending again. This is another reason not to jump ship if you are investing for more than 5-10 years.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.