On Wednesday January 25th 2017 the Dow Jones index hit 20,000 for the first time. Not only is this an all-time high for the Dow, it is a psychological number.
On that same day the NASDAQ hit a new all-time high passing 5,650. And the S&P on the following day briefly surpassed 2,300. Not as exciting psychologically as the number 20,000; but never the less these are new all time highs.
A lot of the growth in the market lately has occurred after the presidential election. And much of that growth is based on anticipation of lower corporate taxes, some deregulation, and increased government spending on infrastructure. But it is also fair to note that there could be some headwinds as well, as there is talk of increased tariffs on imported goods from some countries, namely Mexico.
So what does the smart investor do?
Let’s keep this simple and break it down to 4 key takeaways for investing in this new environment.
1. Be diversified and take a hands-on approach to managing your portfolio. Buy and hold investing could be risky in a market that has already had huge gains. Markets move in cycles: bull and bear. To buy at the top and then hold could potentially cause an investor to experience a big decline (like 2008) if a correction occurs again.
2. Learn from the past. We tend to forget how long a correction can last. The last significant correction was 2008, when equities took a big drop, but started recovering about one year later in 2009. But don’t forget the correction that occurred in 2000 that lasted until the early part of 2003. Sometimes corrections can last a while. This is another reason a buy and hold strategy may not be the smartest approach as markets reach new highs. Remember the decade of 2000-2010 has been called the “Lost Decade” because markets went up and down dramatically, and after all was said and done the buy and hold investor had little to show for it (in fact had LESS to show for it in many cases).
3. Use all of the asset classes to have a truly diversified portfolio. Everyone knows about stocks and bonds, but don’t forget about commodities, international equities, real estate and of course cash. The fact is no one knows with 100% certainty which asset class will take off. Right now everyone’s talking about the market growing like crazy (because equities really have post election). But other asset classes have not performed as strongly since the election, like bonds, real estate, and commodities. A diversified approach helps an investor have exposure to all the asset classes and when done correctly lowers the volatility of the portfolio.
4. Keep a long-term focus when investing. And base your trading decisions on rules that you put in place for your portfolio. Don’t just shoot from the hip, and don’t let political ideologies weigh too heavily in your investing decisions. A Republican too scared to invest in the markets when Obama was elected would have missed out on a great bull market. The same may be said for a Democrat investing under a Trump administration. Time will tell one way or the other.
The long view must be what you use. I wrote about short-term corrections in the year 2016 alone, and how the average investor could’ve shot himself in the foot and missed some good rebounds if they had exited the market due to short-term corrections.
The overall lesson is to have a game plan for how you make your investing decisions.
If you don’t have an investment plan in place, then contact a financial advisor who can help you create one, and keep you on the right track going forward.
If you have any questions please let me know. You can ask me a question confidentially by simply sending me an email [firstname.lastname@example.org]. I know it can be confusing and there are lot of people giving conflicting advice. But you need to have some real facts on your side before determining how to invest your portfolio.
There will be more to say about all this in future posts.
Best of luck,