This month, the Dow Jones Industrial Average hit a milestone, when, for the first time, it closed above 15,000. Of course, 15,000 is a nice, round number, and it sounds pretty big - but what does it mean to you, as an individual investor? Is it cause for celebration - or is it more of a “caution” flag?
There’s no one simple answer to these questions. Since March 2009 - the low point of the market following the 2008 financial crisis - the “Dow” has risen about 130 percent. And while the Dow is just one index, it’s nonetheless an important measure of the market’s performance - which means that you were likely glad to see the 15,000 mark eclipsed and you’d be happy if the numbers just kept rising.
However, as you’re no doubt aware, the market does not move in just one direction. Typically, declines of 10 percent or more - or “corrections” - occur about once a year. Unfortunately, they’re not predictable. Sooner or later, the markets will indeed change course, at least for the short term. When this happens, don’t panic - corrections are a normal part of the market cycle. Still, you might feel like you should do something to cope with the downturn. But what?
Here are a few suggestions:
Keep investing - Too many people, when faced with a market drop, decide to “cut their losses” and take a “time out” from investing. But that can be a costly mistake - had these investors bailed out of the market in 2009, and only recently returned, they would have missed a substantial part of that 130 percent run-up in the Dow. And when you invest in a down market, your dollars may actually go farther if the market rebounds, because you would have bought more shares at the lower prices.
Review your portfolio - It’s usually a good idea to review your portfolio at least once a year, and it may be especially important during those times when the market changes directions. Over time, a portfolio can become unbalanced - for example, following a long period of rising prices, some of your growth-oriented investments may have gained so much value that they now take up a larger percentage of your holdings than you had intended, possibly subjecting you to a greater level of risk than you desire. If this happens, you may need to scale back on these investments and reallocate the money elsewhere.
Diversify - Always look for ways to spread your dollars among a range of vehicles - stocks, bonds, government securities, certificates of deposit (CDs) and other investments. Even within these classes, look for ways to diversify further, such as owning different types of stocks, bonds of varying maturities, and so on. Diversification can’t guarantee a profit or protect against a loss, but it can help reduce the impact of volatility that can occur in a downturn.
The Dow at 15,000 is certainly no minor event. And since stocks don’t appear too expensive compared to their earnings, don’t be surprised if higher milestones follow. But record highs can be quickly forgotten when the market falls. By being prepared for that day, too, you can help yourself continue to work toward your goals - even when the major market indices have, for the moment, taken a wrong turn.
Brian Humphrey is a financial consultant and investment advisor.