With the generational bear market that began in October of 2007 we saw U.S. stocks, as measured by the S&P 500, drop 57%. The market bottomed out in March 2009 and since that time we have experienced a four-year bull market that brought the U.S. stock market to an all-time high. If you fear that you’ve missed the party, there is plenty of data that would suggest this market is still undervalued by 15% or more. However, at these Universal Coin, it would be prudent to consider adopting a few rules to guide your investing. Here are my Do’s and Don’ts for investing with the market at an all-time high:
· Establish a target allocation. Start with the broad allocation between stocks, bonds and money market. For example, you may set your allocation at 40% stocks or stock mutual funds; 50% bonds or bond mutual funds; and 10% in the money market. You might further subdivide your stocks into 20% US large companies; 12% US small companies; and 8% international stocks. Bonds might be subdivided into 20% short-term bonds; 15% intermediate-term bonds; and 15% longer-term bonds. How you split the investments up depends on your perception of the tradeoff between risk and reward. What’s important is that you think through and establish a specific allocation.
· Rebalance your investments. With a sustained bull market you’re going to have securities that have done exceedingly well while others have lagged. At least annually you should rebalance your portfolio back to your target allocations, which will force you redistribute some of your profits to securities that have underperformed but that you still have confidence in.
· Use dollar cost averaging. With four years of a rising stock market which is now at an all-time high, you might be nervous about jumping into the stock market with your cash. One way to mitigate some of the immediate risks is to divide your cash up into equal parts and invest over several months. If the market tanks, you’ll have fresh cash to invest at lower prices.
· Increase your monthly investments. In more than 95% of the cases, American workers are under-saving for retirement so use any pay raises or bonuses to increase contributions to your retirement investments.
· Fight the Fed. Federal Reserve monetary policy has a huge impact on both our economy and the markets. For years, the Federal Reserve has maintained an easy money strategy which has driven interest rates down to historically low levels. As a result, interest paid on bonds, CDs and money market accounts are a pittance of what it was a few short years ago. The result is to force investors to consider equities as an alternative to fixed income. The Federal Reserve chairman, Ben Bernanke, has publicly stated he intends to keep interest rates low until unemployment drops to 6.5%. Current unemployment is at 7.7% so I suspect we are two years or more away from a reversal of this easy money policy.
· Sell out on the first significant downturn. A bull market that is four years old and is breaking records is due for a rest. This would be normal and should not be used as a reason to dump stocks. The fundamentals for the stock market remain strong and I believe it will produce superior returns when compared to bonds over the next twelve months to three years.
· Listen to your neighbor. Think carefully who you get your investment advice from. Too often people act on advice from a neighbor, friend or colleague. Instead, you need to develop your own investment philosophy or hire a professional who has five to ten years or more experience.