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Wednesday, March 6, 2013

A Teaching Moment-Record Dow Jones

Teaching moments don't come along every day.  They have to be taken advantage of when they do arrive.

The Dow Jones Industrial Average hit an all-time high yesterday.  So, should we release the balloons and celebrate?  Actually, it depends.  If you are retired, go ahead and sip some champagne and let the balloons go.  Otherwise, take it in stride.  In particular, if you are building a nest egg, record highs are not what you want to see. You could very well be buying at prices that, in retrospect, will be high.  WHAT YOU CARE ABOUT IS WHERE THE MARKET IS WHEN YOU START DRAWING A PAYCHECK OFF OF YOUR NEST EGG!

It actually would be better for you, the dollar cost averager, if the market was down 20%!  Hopefully I didn't totally take away your warm, fuzzy feeling.

Looking Back

To gain some insight, let's take a step back 12 months and ask what we would have done if we knew some of the things that would happen over the ensuing 12 months.  Suppose we knew the government would continue its dysfunctionality, pushing to the fiscal cliff up until the last minute and actually going through with the sequester.  Assume we knew that the growth rate of the economy would remain anemic with only slight improvement on the job front.  Assume we knew the Italians would have a 3-ring circus of an election and bring the European malaise back to the forefront, not to mention the huge questions arising out of China.

Actually a lot of professionals saw these events unfolding and did what you would expect - they reduced stock exposure and took actions to take "risk off," as they like to say.  Consider, though, the following real world graph of the value of a portfolio positioned with 60% stocks and 40% bonds + cash, comprised of low-cost, exchange-traded funds managed on a "buy and hold" basis, carefully tracking the 60/40 agreed upon asset allocation.

Source: Schwab
 CLICK TO ENLARGE  The arrows show dysfunctional government events.  From left to right, you have the debt ceiling debacle, the fiscal cliff, and the sequester.  One after another, professionals and politicians on CNBC ranted and raved about the likely impact on the market.  In fact, the downturn initially (before the immunity built up?) was reason enough for market timers to exit the market.

What seems to have gone unappreciated by many has been the impact of Ben Bernanke on pushing investors into risky assets.  Simply, avoiding risk is very costly these days with short-term rates at zero and the 10-year Treasury note below 2%.  Investors figured out that taking risk byscarfing up dividend payers was the better choice.

Hopefully, your account has participated in the run up.  If it hasn't. you may want to ask questions.  It could be a teaching moment on how your retirement assets are managed.

Disclosure:  Past returns are not indicative of future performance.  This post is for educational purposes only.  Investors should do their own research or consult a professional before making investment decisions.

1 comment:

  1. Here's to all those who sold out at the bottom. It was a wonderful ride back up.