On Friday February 1, 2013 the Dow Jones Industrial Average closed 14,010. This is the first close above 14,000 for the index since October of 2007. The news media is, of course, making a huge deal about this. It’s newsworthy and captivates the public’s interest.
In reality 14,000 or any number on the Dow is pretty meaningless. For example the Dow sustained a triple digit loss today. I discussed this in my recent US News Smarter Investor contribution (as picked up by Business Insider) I Couldn’t Care Less How Well The Stock Market Is Doing Right Now And Neither Should You. As I said in the article “I have no idea what the stock market will do over the next year let alone the next week. Frankly I really don’t care. My opinion is that your financial plan, your tolerance for risk, and your financial goals should drive your investment allocation. Any buying or selling of stocks or any other type of investment should be driven by keeping your asset allocation in line with your financial plan.”
In fact the Dow is a pretty narrowly focused index of 30 stocks of very large companies. While this index is influential and widely followed it is not really a good indicator of much of anything.
A look at the S&P 500
Let’s take a look at “the market” as depicted by another widely followed index, the S&P 500, an index of the 500 largest U.S. stocks. Not only is the S&P 500 a broader large cap index than the Dow, it also tends to be a benchmark for many investment managers. The following chart from JP Morgan shows the behavior of the index from 1997 through December 31,2012:
As I write this the S&P 500 is straddling the 1,500 mark, about 4% below its all time high of 1565 set in October of 2007. As you can see from the chart the current market rally off of the March 2009 lows is some 46 months along now. According to data from S&P the average length of nine Bull Markets off of market low points since 1946 is 68 months, with a range in length from 26 months to 148 months.
What does this all mean?
In this writer’s opinion all of this hype and hoopla surrounding the Dow hitting 14,000 and the S&P hitting 1,500 is pretty meaningless. Investors need to diversify among various asset classes and types of holdings such as stocks and bonds (funds or individual holdings) both domestic and international. The chart below from JP Morgan below does a nice job of showing the benefits of a diversified portfolio over time. Various benchmarks and asset classes are depicted across equities, fixed income, real estate, and alternatives. This chart also does a nice job of showing the ups and downs of the returns of the various asset classes both on a relative and an absolute basis from year to year. Note the Asset Allocation portfolio depicted by the graph points in the middle of the chart. While this is a sample portfolio compiled by JP Morgan, it does demonstrate the benefits of diversification.
What to do now
This is a great time to ignore the market hype and stick to your financial plan if you have one in place, or to get one done if you don’t. Investing isn’t different in 2013 no matter what the talking suits on CNBC and elsewhere might tell you. If anything the investing landscape becomes more treacherous as the market increases. Don’t panic, but don’t let yourself get caught up in the hype either.
Please feel free to contact me with your financial planning and investing questions at any time.
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The charts are courtesy of JP Morgan Asset Management.