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As the stock market keeps climbing into the stratosphere, I have some advice for panicky investors worried about a market that seems to know no mountain it cannot scale.
The numbers are now in for the last quarter and the U.S. stock market had a fantastic first six months of the year. The S&P 500, which measures the 500 largest U.S. companies, is up 6 percent the first half of the year, not including dividends so it’s really higher than that. The Dow, which measures the 30 largest companies, is up 1.5 percent. And the tech-heavy NASDAQ is up 5 percent.
So the stock market is generously valued. That much is clear. But the picture gets murky because people get nervous and wonder if they should sell before it all comes crashing down. They remember all too well the Great Recession when values totally cratered.
What’s next for the stock market?
While some skepticism based on past experience is healthy, fear is not. The reality is the stock market is so highly valued that we are going to have a correction, which means values will drop 10 percent. It’s also likely we’ll have a bear market, which means we’ll be 20 percent down or more.
So should you go sell everything today? Absolutely not. If you’re putting in money through a retirement plan at work and have a lengthy horizon until you have to use that money, just keep going along paycheck by paycheck with your investing. That’s called dollar cost averaging, and it can make you a fortune over time.
On the other hand, if you have had huge gains in investments, particularly outside of a 401(k), and you’ll need it in next several years, it’s a good time to take some chips off the table. I haven’t taken this advice as of yet. But that’s only because I don’t need any of the money for the forseeable future. If you do, if you need it in next three years or so, it’s a good idea to rebalance and take some money out of the game.
If you don’t need the money for seven or more years, then just ignore the values, the correction, and the bear market and keep on investing. You can’t time the market. But it is time in the market that makes you money in the long haul.
So, to recap: For money that you must use in the next few years, that’s a risk. On the other hand, if you have money that is for a far future use, ignore all headlines. The key is to be in the game because wealth flows to owners over time.
For more guidance, see my investment guide at ClarkHoward.com/invest.
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