Every time stocks reach new highs, it should give you pause.
With the S&P 500 hitting and clearing its previous high water mark last week, the news outlets are very excited…but what should you do?
Here are three keys to keep in mind before taking any action:
This is not a big deal.
Try not to get too excited. The market has hit new highs a zillion times before this and will continue to do so, barring the kind of global economic disruption the world has never seen. Stock prices have a tendency to move up more than down over time, and it is inconsequential that the most widely followed index (which is not adjusted for inflation) happens to be at the highest numerical value of all time this week. According to CNBC, the Dow Jones Industrial Average closed at record highs 52 times in 2013, a welcome statistic that reflects economic recovery but also a very accommodative Federal Reserve.
Historically speaking, this would not be the time to pile into stocks if you aren’t already there. Think of climbing a ladder. The higher you climb, the more danger you are in. Remember your time horizon. If you’ve been saving for a long-term goal that has become a short-term goal, the stock market has given you a gift…but don’t get greedy. We can’t tell if the market will climb higher in the short term, but we know it’s climbed mightily in the recent past, and you shouldn’t be will ing to lose your bird-in-hand for the possible prize looming in the bush. Greed and fear cost investors a lot of money and, recently, fear has been waning. Be careful not to get too overzealous.
Can This Continue?
Absolutely. While exercising caution is wise, going into freak-out mode isn’t advised either. If you are a long term investor and are willing to ride the cycles out, consider rebalancing your portfolio instead of selling all of your stocks. Shifting your portfolio back to the way it once looked, before the bull market made it stock-heavy, would allow you to take gains off the table and redeploy some of your winnings to the unloved bond funds or alternative asset classes. This is the very meaning of buying low and selling high. Remember, just because it wouldn’t be “justified” by the economic statistics, the market could run higher for months or years unabated since it’s investor sentiment, and not the economy, that drives stock prices. You need to be “okay” with missing some upside when protecting your downside (or backside).