The US stock market is near all-time record highs. The DJIA, the S&P 500 and the Russell 2000, a small company index, are all very close to their all-time highs.
Does this mean you should sell? Should you be worried or confident?
The stock markets of the US and the world have moved higher, not lower, over the long term. New highs have occurred hundreds of times, or more, in the past, and will reach new highs many times again in the future. Thus, the natural progression is to reach new highs.
We know that stocks will never move in a straight upward line. Stocks involve risk. Investing in stocks can mean enduring significant, quick declines and multi-year losing periods that seem like they will never end. But they do.
As we have seen repeatedly this year, a number of swift drops have been followed by stronger gains that have brought the major indices to higher levels than they were at the beginning of 2016.
Gains sometimes come at surprising times. This is why it is important to remain invested, regardless of what you may be thinking, worried about or what the media is focusing on. Given all the negativity that exists in the US and the world right now, US and International stock markets are positive for 2016.
Our clients, who have remained allocated in a globally diversified portfolio of stock funds in accordance with their desired investment plans, have experienced both up and down markets. By remaining disciplined, patient and positive, they have been rewarded with financial gains.
Our investment philosophy is based on a long term perspective so our clients can be rewarded by the overall growth in world-wide stock markets. The markets’ reaching new highs is certainly not a reason for us to make a major change in our investment philosophy. We would not recommend selling a major portion of a client’s stock fund holdings, just because the US stock market has reached a new high. That would be market timing, which has proven to be a loser’s game.
As we wrote about last week, How to consistently buy low and sell high, we may rebalance client portfolios and sell a small portion of a client’s stock funds. It may be appropriate for us to take some profits and re-allocate those assets into underperforming asset classes or into fixed income investments. This is a way to keep the amount of risk (stock allocation) in line with what we and the client have agreed upon is in their financial best interest.
The following concepts will help you to be positive and confident in our investment approach:
- The rise of stocks in the long run is permanent.
- Stock declines are temporary
- Uncertainly will always be with us. There will always be a next crisis. Each crisis will eventually fade into a distant memory, or you will forget about it completely.
- If you have ever sold out of a market and stayed out, you are way behind the broad markets.
- What drives stock market returns over time is the long-term resilience and innovation of companies to grow their earnings, cash flows and dividends.
- Over the 10 years ending 12/31/15, over 82% of US large cap managers, 88% of US mid-cap managers and 88% of US small-cap mutual fund managers have underperformed their respective benchmark. The trend is the same for International mutual funds.
- This is why we adopted our investment philosophy when we started our firm and continue to be even more confident in this approach. We invest in low cost mutual funds which are similar to benchmarks. By doing this, we expect to provide you with better returns than most other money managers or mutual funds over the long-term.
We are confident, despite all the troubles in the US and the world, that the long term economic future will be positive. We are rational optimists.
We look forward to helping you and your family plan and invest for the future. The future may be unknown and uncertain, but we will strive to do our best to help you handle that uncertainty, as well as be positive, confident and financially secure.