Dow Reaches New All-Time High…So What

The Dow recently hit a new high, but what does this mean to the average investor.  An investor is likely to see many new highs along with occasional market declines often referred to as corrections over many years.  However, the general trend of the market over the long-term has been higher.  The intelligent investor will not experience euphoria when the Dow achieves a record high, but will continue to maintain a diversified portfolio and invest in accordance with his or her financial goals.  Nor will the investor panic and move out of equities when the market incurs a 10 or 20 percent decline. 

Does this mean that investors should ignore current economic conditions?  Not at all, but it does not mean taking drastic measures like moving in and out of equities as a reaction to market highs and lows, a recipe for buying high and selling low.

We must face facts that tell us our government cannot sustain the current fiscal course that it is on. Our deficit is approaching $17 trillion of which $6 trillion has been added in the last four years. Entitlement programs (Medicare, Medicaid and Social Security) need revision and placed on a sustainable basis for the future.  The Affordable Care Act is now estimated to cost three times as much as when it was enacted by Congress.  Our economy is barely growing and unemployment remains close to 8 percent.  The Federal Reserve is keeping interest rates at artificial lows and is buying $85 billion of U.S. debt per month, effectively printing money.  This has in part led to the new highs in the stock market.  As a long-time student of economics I know that this cannot continue.  Look at what has been happening to some of the European countries, like Greece, Spain, Italy and now Cypress.  These countries with huge social welfare programs have long been spending more than they could afford and are now paying a steep price.

Where do we go from here?  We must continue to save and invest to reach our financial goals and hope that our government changes fiscal course before it is too late.  As a long-term investor and a student of economics I can share with you what I have learned from history which I use as a guide in helping me make decisions regarding money management and investing. 

I stress defensive portfolios not only for tough economic times, but for all the time since we cannot predict with accuracy when tough times will occur.  Defensive portfolios are low cost, diversified portfolios designed to protect against market declines, recessions, high inflation and bad news.  They tend to be risk adjusted but not risk free.  Diversification and low cost are key components of defensive portfolios.  You will find low cost index funds and Exchange Traded Funds (ETFs) in a defensive portfolio.  A defensive portfolio will not produce the high returns we see in a booming stock market, but will help mitigate the sharp losses often experienced in a declining market.

You can begin making your portfolio more defensive by looking at your investment expenses as a percentage of your portfolio.  Average investment expense should be in the range of one-half to one and a quarter percent.  Investment expenses include mutual fund and ETF expenses and fees charged by an advisor if applicable.  Frequent trading of securities can result in excessive commissions.  As a long-term investor you should not be engaging in frequent trading.  Remember, the lower your investment expenses the greater your investment return.

Finally, invest regularly if you can to benefit from dollar cost averaging.  By investing a fixed sum monthly or quarterly in your employer’s 401(k), IRA or other retirement plan you will be accumulating more shares when prices are lower.  Disciplined regular investing will have a greater impact on your long-term wealth accumulation than investment returns.