Today, as you most likely already heard, the DOW Jones Industrial Average closed up over 13,000, at 13,005.12 to be exact; the first time we’ve reached that level since May, 2008.
The logical question is, if this milestone made the news, how does that information impact my portfolio, and what action should I take, if any?
Well, to answer the first question, to the extent of your US Large stock holdings, your account value has gone up marginally from yesterday to today’s close, and would now be valued at slightly higher than it was in early 2008.
To answer the second question, no trading should be precipitated because of this news. As a matter of fact, market prices go up and market prices go down; they generally follow cycles that ebb and flow. Some pundits are stating that the market prices will surely pull back from here; suggesting taking measures to “lock” in their gains, however meager, right now. Yet if their gains have shown up mostly since the first of 2012, investors would be selling their holdings prior to having held the stocks or stock mutual funds for a year and a day, and thus be subject to short-term capital gains rates, which mirror your individual income tax bracket, whereas gains on assets that have been held for at least a year and a day are still taxed at a maximum federal 15% bracket—a real steal!
We must resist the press’ encouragement and urging to “act” based upon today’s (or any) day’s news, just as we would restrain ourselves from taking drastic action if our child brought home either an A or a D on a daily quiz. We may well ask the child what happened that resulted in either grade, yet we would most likely frame that single grade amidst several other quiz grades, and form an opinion as to whether the goal (in this case, our child’s education) is progressing in a satisfactory manner, or not.
Investing, like learning, is a task for several weeks, months and years. A day’s price does not an investment make! So, fair warning: just about the time our emotions get heightened the next time we hear, or read about stock market activity, I urge us to separate our emotions from our intellect. We will allow our emotions to question and react, and then we will harken back to our overall financial plan, which most likely entails purchasing investments—either with lump sums of money, or spread out over successive months; through a process called Dollar Cost Averaging.
Dollar Cost Averaging it the fancy term for splitting one’s lump sum into equal monthly installments that will be invested, perhaps at the end of each upcoming month, over a period of 6-12 months, generally. So, if we have 24,000 to invest, we might spread that investment over, let’s say, 6 months. Here’s how that math works: we divide 24,000 by 6, and the answer is $4,000. We would invest $4,000 at the end of February—tomorrow, and then invest another $4,000 at the end of March, and then another $4,000 at the end of April, and then May, June and finally July. Yet, because we do not have a crystal ball, we cannot tell if the price of these investments will be higher or lower than today’s value, so one strategy to mitigate that price risk, involves making systematic monthly purchases through Dollar Cost Averaging, that overall, have proven to be more effective than attempting to select one particular day in which to invest our lump sum.
This process has worked very well for investors, and it is the exact model that most 401(k) retirement plans, and most 403(b) pension plans utilize by allowing the employee to select an amount that they want to invest, such that the employer simply takes that amount right off the top of each month’s—or pay period’s check—and invests that money directly into the retirement plan sub-accounts. This automatic investing often compounds into a respectable sum in even a few years.
Actually, we really want the price of our investments to drop while we are investing, as when that happens, we are able to purchase more units of the investment. Here’s an example of us investing $200 per month, each and every month. Let’s keep the math simple now, by make believing we’ll be investing only into one sub-account, whose price today was $5.00 per share. So, we divide $200 by $5.00 and we get 40 units for our investment today. If the market price of that sub-account goes up to let’s say even 5.50 per share next month, we’ll only be able to purchase $200 divided by $5.50, which is 36.3636 units. “Yes, but the units are worth less than yesterday, you retort!” My reply is that your focus needs to be on accumulating as many UNITS as possible, rather than concerning yourself with the actual price of that particular sub-account. Upon your retirement, or whenever you choose to begin withdrawing sums of money, we’ll decide which particular units we wish to cash in first, as by then, you will have amassed probably 4 -8 different subaccounts.
Summarizing then, IF you do not have a strategy for investing now, IF you do not know whether you should be in the market or not, then the first step is to review your short term and medium term goals against the monies you have stashed wherever, and determine if you are poised to meet your goals. If not, may I suggest that you begin to invest, systematically into the markets, and especially the stock markets for any amounts that you are expecting to grow at a rate that would (as least historically speaking) perform at a higher rate than the cost of living (inflation).
Let’s develop or hone our plans for investing and be diligent about sticking to our plan, rather than being “whipped by the wind” of individual days’ price swings. I suspect we are in for yet MORE price volatility, so make your plan, work your plan, and once a year review your plan, preferably with a fee-only Certified Financial Planner, who can ensure you are effectively diversified, in order to meet your goals.
As Margaret Thatcher’s advisors admonished her in the movie, Iron Lady, “if you want to change ….. lead! God Speed to you, as you lead your investing with a well-thought out plan, and then you follow that very plan, period.