Economy & Jobs
What’s Your Stock Market Strategy During an All-Time High?
The stock market is at an all-time high, with the Dow Jones having crossed the symbolic 18,000-benchmark for the first time ever at the end of 2014. (The 18,000 figure isn’t significant per se, except that it’s a nice round number, like turning 30 or celebrating New Year’s Eve in 2000.)
Some people might adopt a stock market strategy of jumping into this bull market headfirst; a strong economy keeps rising, right? Others might take it as a sign to exit the market, reasoning that they should cash out at the top to lock in those gains. Which of these is the better option?
Dive in Headfirst, or Exit on Top?
The answer may be C, none of the above. There’s a particular wisdom to neither having a fear of heights (or staying out of the market when it’s hot), nor jumping in at new heights and being a latecomer to the party.
But if neither option is a good answer, what should you do? In a nutshell, you should continue with your current strategy—stay the course. And if you’re not investing yet, start today. The longer you’re in the market, the more time there is for your money to grow.
Investing Through Dollar-Cost Averaging
Investors, particularly if they’re young, can benefit most from dollar-cost averaging (DCA), the practice of investing the same amount every month regardless of how the overall market is performing. By following the DCA method, investors naturally buy fewer shares when the market is high and more shares when it’s low. This method leads you to “buy on the dip” while simultaneously spreading risk and exposure out over a long period of time.
Let’s look at an example: In January, your favorite fund costs $25 per share. You have $500, which buys you 20 shares. In February, that same fund costs $28 per share. You invest $500, which buys 17.8 shares; you purchase fewer shares, because the price is higher. In March, the fund drops to $20 per share, enabling you to buy 25 shares—more shares because they’re cheaper.
In other words, dollar-cost averaging is a systematic way of buying shares when they’re on sale and participating in upturns without getting too exuberant. You could instead monitor the prices yourself and potentially garner extra shares purchased cheaply, but it’s hard to tell when a sinking stock has hit rock bottom.
Going for the Long-Term
You don’t need to worry about the ups and downs of the day-to-day stock market as long as you stick to a long-term plan. Stocks invested over a 20-year time span, weathering bear and bull cycles, have a median annualized return of 4.1 percent after inflation, or about 7 percent including inflation. Investing legend Warren Buffet, the most successful investor of the 20th century, predicts that long-term returns will continue in the 21st century around 6 to 7 percent, including inflation.
If you’re new to the market, never fear. It’s relatively easy to get started: Simply open a free account with a brokerage that offers low fees, such as Vanguard, Charles Schwab, or Fidelity. If you’re not sure how to invest, one option is to start with a target-date retirement fund. Contribute as much as you can toward your estimated year of retirement—ideally at least 10 percent of your annual salary.
When it comes to a good stock market strategy, keep a long-term perspective, dollar-cost average a portion of your paychecks monthly, and realign your priorities periodically. That’ll help you catch the growth that the markets contain, beat inflation, and sleep easier at night.