New Stock Market Highs & What It Means To You

May 2013

It wasn’t that long ago when I sat down with clients who were literally frightened by the stock market collapse in 2008 and early 2009, and wanted to pull every last dollar from their portfolio and put it into cash.  Those conversations were challenging because while I was explaining the importance of having a goal-oriented approach to investing(as we at Bloom Asset Management espouse), some clients were asking if the stock market would ever recoup what it had lost up until that time.  Some clients thought the market would never get back to those October 2007 highs while others thought it would take ten years or longer to do so.

Fast forward to today, and we are talking about record highs on the Dow Jones Industrial Average and Standard & Poor’s 500 Index.  In some ways, these new market highs are confounding when you think about where we were a short time ago.  In other ways, the market is merely playing catch-up to corporate earnings that have been nothing short of breathtaking since the lows of the market in early 2009.  In fact, when you exclude 2007 and 2008, corporate profits have outperformed the stock market dating back to the end of 2002!  Unfortunately, strong corporate earnings have been overshadowed by two massive stock market collapses, so we have to give investors some measure of forgiveness.

Unlike previous market rallies, these days I’m hearing from a few clients that the market has gone up too much and too fast and is destined to correct.  In my opinion the market will decline at some point in the near future, which is not unusual since market pullbacks are a normal occurrence.  However, the market will most likely not decline on the level it did in 2008.  Regardless, some clients still ask,” isn’t it time to scale back on stocks?”  It is an interesting thought, but the wrong question.  Here are some thoughts I have on how investors should respond to these new market highs:

–  Just because the market reaches a new high doesn’t mean it will crash.  There are a lot of measuring sticks we look at to assess the health of the market, and right now, other than Europe’s woes, the economy is stabilizing and still growing, and not necessarily contracting.  Investors need to understand that there is a difference between a market pullback, correction, and crash.  The former are normal occurrences, while the latter are generally caused by economic, financial or even geopolitical shocks.

–  Dedicate yourself to a sound asset allocation plan and stick with it through thick and thin.  This is a cliché but it works over the long-term.  As an example, if you are targeting a 70% exposure to stocks and 30% exposure to bonds, then make sure that allocation remains in place during good and bad times.  If stocks perform well, then you will most likely have to sell some stocks and add to bonds, and vice versa. Do this regardless of market sentiment.   Caveat: Your decision to sell stocks and buy bonds will go against conventional wisdom, but be strong and ignore the bulls.

–  Ignore the bullish salespeople on CNBC and other financial talk shows.  They know absolutely nothing about your personal situation and financial goals, which is the foundation you should always use to determine your investment strategy.

–  Trying to outguess which way the market moves is a consistently, long-term failed strategy.  Even market pros who spend countless hours analyzing and assessing market trends and statistics have a difficult time consistently figuring out what direction the market will take.

–  Don’t assume the rise and fall of the market is directly related to the economy.  It is pretty obvious that correlation has gone out the window with this continued market rise, because the economy has continued to struggle.  Because we are in a more global environment these days, there are plenty of other things that impact the market, both positively and negatively.

– If all of this seems puzzling and confusing, then consider hiring a financial advisor, but don’t assume every advisor is the same.  Not all of us are salespeople looking to sell you the hottest fad or product available.  Firms like Bloom Asset Management are paid 100% from its clients, and not from selling products.  Therefore, if you cannot go about this alone, then by all means, do your due diligence and find out what makes advisors and their firms tick.  Understand their investment approaches, their fees, and their competencies.  Having a long-term partner and fiduciary by your side can be very rewarding to you and your family.

Just remember, if you are an investor that has a well thought-out, long-term investment plan, you would do well to stick to stick to your strategy instead of jumping out the proverbial window regardless of whether the Dow or S & P 500 Index are hitting all-time highs or lows.  Now, if your investment strategy is totally dictated by the daily ups and downs of the market, then you need to change your approach!

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