Objective information about financial planning, investments, and retirement plans

Dow 18,000 – A Big Deal?

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In February of 2013 I wrote Dow 14,000 – Big Deal or Just a Number?  Today the Dow Jones Industrial Average closed at 17,778 after a 421 point gain.  This is on the heels of a better than 200 point rise yesterday marking the average’s largest two day gain in 12 years.  Dow 18,000 looks like it will not be far off.

Just as I thought Dow 14,000 was a pretty meaningless number, I also think Dow 18,000 is equally meaningless.  In fact there are many, including yours truly, who think the Dow Jones Industrial Average isn’t all that meaningful as a benchmark.

Rather than focusing on the level of the market you should focus on your portfolio and your investment strategy.  Some specific action steps you might consider:

Rebalance your portfolio

You should have a strategy to review your overall portfolio on a regular basis (annually, semi-annually etc.) to ensure that your asset allocation is within your target allocation.  Invariably certain asset classes will outperform or under perform.  Bringing your portfolio back into balance forces you to sell off some winners and fund those asset classes that have underperformed.

Market leaders and laggards shift periodically and this approach adds a level of discipline to your strategy.  Mostly rebalancing helps mitigate investment risk.

Keep expenses low 

You can’t control how the markets will perform.  You can control your investment expenses.  Specifically:

  • Mutual fund and ETF expenses.
  • Trading costs at your custodian.
  • The cost of financial advice

Revisit your investment strategy 

I view market highs as a great time to revisit your investment strategy and your financial plan.  If you’ve been fully and properly invested your portfolio has hopefully risen along with the markets.

Where does this leave you in terms of progress towards achieving your financial goals?  This is a good time to revisit your financial plan.

The Bottom Line

Is Dow 18,000 a big deal?  Not in my book and frankly I wonder if anyone besides the financial news media really cares.  I suggest focusing on the details of your portfolio and your strategy and ignoring the hype.

Check out an online service like Personal Capital to manage all of your accounts all in one place or purchase the latest version of Quicken.  Check out our Resources page for more tools and services.

What I’m Reading: Stock Market Highs – Trick-or-Treat Edition

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This past Friday was Halloween and that means trick-or-treaters dressed in all sorts of neat costumes.  We didn’t have a lot of kids ring the bell so the neighbor girl made out big-time when she and a friend came to the door later in the evening.

Of note in the financial markets on Friday was the fact that the Dow Jones Industrial Average finished at a record high level as did the S&P 500 Index.  The NASDAQ finished at its highest level since March of 2000.   No Dead Bodies Here: New Highs for the S&P 500, Dow; Small Caps Soar by Ben Levisohn in Barons provides a good recap.  The new stock market highs on Halloween capped some scary market swings during October which saw precipitous drops around the middle of the month.

Here are a few financial articles I suggest that you check out:

Investing Blog Roundup: Schwab “Intelligent Portfolios” is the latest edition of Michael Piper’s excellent weekly collection of good financial reads.

Barbara Freidberg answers a reader’s question in Should I Buy Bonds Now?

Ben Eisen writes Investors buy stock funds at fastest pace in a year. 

The Myth of the Dumb 401(k) Investor by Morningstar’s John Rekenthaler.

Managing Someone Else’s Emotions provides a nice discussion of one of the toughest parts of a financial advisor’s job via Ben Carlson.

3 Signs You Have a ‘Zombie’ 401(k) by Scott Holsopple.

I recently became a contributor to Investopedia.  Here are my two most recent articles:

5 Things You Need To Know About Index Funds

Closing In On Retirement? Read These Tips

It will be interesting to see where the stock market goes from here.  I’m hoping the rest of 2014 is not as volatile as the month of October has been.

Enjoy your weekend, back to college football and eating our stash of Halloween candy.

Is the Dow Jones Industrial Average Still a Relevant Stock Market Index?

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The Dow Jones Industrial Average (DJIA) of 30 large stocks has long been arguably the most watched index for those following the stock market.  As I write this IBM a long-time index component reported a major miss in its quarterly earnings.

The stock was down some 7% for the day and due to this decline the DJIA was been down most of the day.  The index finished up some 19 points but without the drag of IBM the index would have been up around 100 points according to a commentator on CNBC.  This begs the question is the Dow Jones Industrial Average still a relevant stock market index?

It’s just 30 stocks 

The DJIA is a weighted average (the actual weighting formula is very complex) of the price of the 30 stocks that comprise the index.  Originally the index was supposed to represent the stocks of large industrial companies.  Over the years the composition of the index has changed to reflect the changing nature of American business.

Here are the 30 companies that comprise the index:

Company

 

 

 

 

 

3M Co
American Express Co
AT&T Inc
Boeing Co
Caterpillar Inc
Chevron Corp
Cisco Systems Inc
E I du Pont de Nemours and Co
Exxon Mobil Corp
General Electric Co
Goldman Sachs Group Inc
Home Depot Inc
Intel Corp
International Business Machines
Johnson & Johnson
JPMorgan Chase and Co
McDonald’s Corp
Merck & Co Inc
Microsoft Corp
Nike Inc
Pfizer Inc
Procter & Gamble Co
The Coca-Cola Co
Travelers Companies Inc
United Technologies Corp
UnitedHealth Group Inc
Verizon Communications Inc
Visa Inc
Wal-Mart Stores Inc
Walt Disney Co

 

Certainly a nice mix of manufacturers, retail, financial services, and technology related companies.  Three major names absent from the index include Google, Facebook, and Apple.  While these are large and influential companies they do not represent the total focus of the investment universe.

Chuck Jaffe wrote this excellent piece on the topic of the Dow It’s time to ditch the Dow Jones Industrial Average  over at the Market Watch site.

Investing options are varied and global 

Of the major market benchmarks the broader S&P 500 seems to hold a lot more sway with many money managers and others in the finance and investing world.  I know that personally I am a lot more concerned with this index as a benchmark for large cap mutual funds and ETFs than the Dow.

The NASDAQ is also widely watched due to its heavy tech influence.  I think the bursting of the Dot Com bubble put this index on the radar to stay back in early 2000.

Other key benchmarks include the Russell 2000 for small cap stocks, the Russell Mid Cap, the EAFE for large cap foreign stocks and many others for various market niches.  Additionally there are any number of index mutual funds and ETFs that follow these and other key benchmarks for those who want to invest in these segments of the stock market.

While I’m guessing the Dow will remain a widely watched and quoted stock market indicator I and many others find it increasingly irrelevant.  It is always a good idea to benchmark your investments against the appropriate index for a single holding or a blended, weighted benchmark to gauge your overall portfolio’s performance.

Your 401(k) – A To Do List for the Rest of 2014

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In a recent post Eight Financial To Do Items for the Rest of 2014, I outlined several items for your financial to do list for the rest of 2014.  One of those items was to review your 401(k) plan.  Here are a few more steps to take with your 401(k) plan yet this year.

Review your salary deferral amount

The maximum dollar amount that you can defer from your salary is $17,500 or $23,000 if you are 50 or over at any point during 2014.  If you are not on track to max out your contributions now is a good time to see if you can increase your salary deferral percentage even by 1%.  In the long run this will put you that much farther ahead in your question to build a retirement nest egg.

Review and if needed rebalance your account

Both the S&P 500 and the Dow Jones Industrial Average have hit a number of new record highs during 2014 on the heels of a very solid 2013.  In fact the S&P 500 Index is up almost threefold since the market lows of March, 2009.  If you haven’t recently rebalanced the asset allocation of your account back to your target allocation this is an excellent time to do so.  Better still if your plan offers auto rebalancing this is a great time to sign up if you haven’t already.

Be aware of any changes to the plan

Fall is open enrollment time for employee benefits for many companies.  While changes to the level of your salary deferral contributions as well as to the investment choices you make can be done throughout the year, many companies choose this time frame to announce changes to their plan for the upcoming year.  This might include the level of the employer match, the addition of a Roth 401(k) feature, or changes to the menu of investment choices available to you.  You need to be aware of any and all changes to the plan and be ready to make any applicable adjustments based upon your situation.

Be cautious when it comes to company stock 

Perhaps as a sub-set of the rebalancing section mentioned earlier if your account includes an investment in your company’s stock this is a good time to review how much you have allocated there and if needed pare that amount down.  There are no hard and fast rules but many financial advisors suggest keeping your allocation to company stock to 10% or less.  The rational here is that you already depend upon your employer for your livelihood; if the company runs into problems you might find yourself unemployed and holding a lot of devalued company stock in your retirement plan.

Get a handle on any old 401(k) accounts 

It’s not uncommon for folks to have several old 401(k) accounts from former employers.  It’s also not uncommon for these accounts to be neglected and unwatched.  If this describes you make this the year to get your arms around these accounts and make some decisions.  Roll them over to an IRA or if eligible to your current 401(k) plan.  If leaving one or more of them with that former employer is a good decision make sure you monitor the account, rebalance when needed, etc.  The point is even if these accounts are relatively small they can add up and help as you save for retirement.  Take charge and take affirmative action here.

Understand your options should you leave your current employer 

Let’s face it the last part of the year is often when companies do layoffs.  If you suspect that you will be impacted in this way you should at least start thinking about what you will do with your 401(k) account.  The same holds true if you are looking for a new job or considering going out on your own.

As we head into football season, the kid’s activities at school, and the holidays please make some time to tend to these and perhaps other items in connection with your 401(k) plan.  For many of us our 401(k) is our primary retirement savings vehicle, make sure that it is working hard for you.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Friday Finance Links May 3, 2013 – Dow 15,000 Edition

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English: A view from the Member's Gallery insi...

Today the Dow Jones Industrial Average crossed the 15,000 mark for the first time.  Who knows where it will end the day.  What does this mean to you?  It shouldn’t mean anything if you invest according to a coherent plan, other than perhaps that you may need to review and if needed rebalance your portfolio.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Emily compares the Pros and Cons of the 15 vs 30 Year Mortgage at PT Money.

Ken discusses Mutual Fund Expense Ratio: How Much Does It Hurt Investment Performance? at AAAMP Blog.

Kyle asks If Everybody Indexed, Would It Stop Working? at Amateur Asset Allocator.

Posts from Fellow NAPFA Members 

Fern Alix LaRocca warns us to avoid Refi Hell – I Almost Got Taken! at Figuide.com.

Lon Jeffries asks When Did You Last Review Your Insurance Coverage? at Figuide.com.   

Other financial articles from around the web

Andrea Coombes discusses The risks and costs of exotic investments at marketwatch.com.

Dan Solin says CNBC’s Ratings Decline is Bullish News for Investors at usnews.com.

In case you missed it here is my latest contribution to the US News Smarter Investor Blog Improving Your Odds in the ‘Retirement Gamble’.

Here’s wishing everyone a great weekend.  

Photo credit:  Wikipedia

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Stock Market Highs and Your 401(k)

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As you are probably aware, the Dow Jones Industrial Average closed at a record high of 14,296; the second day in row for a record close.  Intra-day the index topped the 14,300 mark for the first time ever.  By this benchmark we’ve now gotten past the financial crisis as the prior high was reached pre-crisis in 2007. The S&P 500 Index is also near record territory.  During the financial crisis there was much handwringing about how the 401(k) had failed retirement savers.  It was popular to refer to accounts with reduced balances from losses as a “201(k).”

As of the end of 2012, Fidelity reported that the average 401(k) account balance had risen some 12% during 2012 to $77,300 from $69,100 at the end of 2011.  This is also up from early 2009 when the average was $46,100.  Fidelity estimated that about 2/3 of the 2012 gains were from investment gains and the other 1/3 from a combination of employee salary deferrals and employer matches.

What do I do now with my 401(k) now? 

If you are looking for profound, radical advice here, I suggest that you stop reading this article now.  This will save you from wasting the next 30 seconds of your life.

Assuming that you are still here, the suggestions that I have for the current situation are the same as I would have offered a year ago, five years ago, or ten years ago.  I would have made the same suggestions at the depths of the 2008-2009 financial crises as well.

Review and Rebalance 

A market high is always a good time to review your 401(k) account to ensure that things are not too far out of balance.  Ideally you have a target allocation for investments you chose.  Generally if a client’s allocation varies by more than +/- 5% of the target we consider rebalancing.  Given how quickly the market has risen this year your account might need some attention here.

Review your 401(k) account as part of your overall portfolio 

If you have investments outside of your 401(k) plan such as taxable accounts (stocks, mutual funds, etc.); IRAs; a spouse’s retirement plan and the like this is a good point to review not only your 401(k) account but your overall portfolio.  If you have a financial plan in place a market high is a good point to take stock of how you are tracking toward financial goals such as retirement.  Are you ahead of schedule?  If so perhaps this is a good point in time to not only rebalancing but to consider reducing the risk profile of your portfolio.

Take the long view 

If you watch enough of CNBC or other cable financial news shows, or read enough articles on the web about investing you can probably find someone who will support any position ranging from an impending stock market Armageddon to someone saying this Bull Market will run for another five years or more.  The route to go in my opinion is to largely ignore all of this hype, get a financial plan in place, and invest your 401(k) and any other investment holdings as a total portfolio in line with the goals and risk tolerance that flow out of the financial planning process.

Please feel free to contact me with your financial planning and investing questions. 

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) holdings and all of your investments and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

Photo credit:  takeasmartstep.com

 

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Dow 14,000 – Big Deal or Just a Number?

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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.

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.  

Check out our Resources page for links to some services and tools that you might find beneficial.

The charts are courtesy of JP Morgan Asset Management.

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