Should I Be Scared of the Stock Market?

The frights of Halloween are behind us, but the stock market can still look very scary!  YESTERDAY the Dow flirted with an all-time high milestone of 36,000, before ending the day at 35,913. The Dow has elevated drastically throughout history. As a contributor on WBRC Fox 6 for over twenty years, the same question surfaces every time the stock market approaches a new milestone. In 1998, everyone wondered if the Dow would reach 10,000, and it certainly did.. In 2011, the Dow crossed the 12,000 mark reaching another milestone.

Over the years since, the highs have continued:

It is a misconception to think that the stock market always goes up because that is simply not true. In fact, we have seen some very daunting free-falls along the way. For example, the market dropped over 50% in between 2008-2009. But, so far in our history, the stock market has risen over time because companies seek to make a profit for themselves and their shareholders. This is a prime example of our capitalist form of government.

Today, the main question you should consider is: “What should you do to capitalize on this opportunity?”

1. Review your investments. Are you happy with the allocation between stocks versus fixed income and cash? The further away from retirement you are, the  greater allocation to stocks you should consider.
2. Invest in stocks for the long term. Learn the lesson of the stock market. Over time, the market has returned an average of 9% or higher. If you are still working and if you are systematically investing through a company 401(k) or a similar plan, dips in the stock market work to your advantage. Do not allow scary drops to scare you out of the market!
3. Protect your cash flow. If you are close to retirement or already retired, make sure you have access to money to pay at least 3-5 years’ worth of monthly bills.  This can be satisfied by a recurring income stream, such as Social Security, a pension, or by allocating a portion of your investments to less volatile assets (i.e. CDs, money market accounts and high-quality bonds).
4. Maintain a periodic rebalancing strategy. Whatever your allocation strategy is, make sure that you periodically review your investments for rebalancing to your original allocation strategy.  This will force you to take profits when stocks rise sharply, invest in fixed income, and compel you to sell fixed income and buy stocks when the market falls sharply. Within your stocks, rebalancing will force you to take profits from winners and invest in underperformers at lower prices. If you choose wisely, your under-performers will turn into out-performers in time…so be patient and believe in yourself.

While investing in the stock market can be daunting, do not let this new milestone scare you away from making a worthwhile investment. If you have a financial plan or an investment professional to help direct you in the right direction, you can capitalize on this opportunity. Believe in American Capitalism and in the stock market. Do not be afraid to make that investment for the long term.

For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.

Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States.  He is the author or co-author of six books, including 50 Rules of Success;  J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.

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