So how should you respond to a market milestone?
Before we answer that question, let’s review the Dow Jones Industrial Average making history this week by closing above 19,000 for the first time. As a result, analysts have stated that the blue chip index is now on course to surpass the annual performance of the S&P 500 for the first time since 2011. The Dow has advanced 9.2% this year versus the S&P 500’s 7.8% gain.
The index has risen more than 1,000 points over the past 12 trading days due to a post-election rally, which has boosted shares of industrial and financial services companies. Just a few weeks ago, on November 4, the Dow had slid below 1,800. This was just days before the election, and world markets proceeded to plummet the day Donald J. Trump was elected president.
The market usually tumbles with the uncertainty of a new president. For example, from the election of President Obama in 2008 to his first inauguration, the S&P 500 plunged roughly 20%. Today, investors should be ecstatic about their returns during the Obama Era: the S&P 500 has been up–around 265%–since he has taken office.
No one can predict the performance of the stock market going forward.Â There are some immutable facts, though. The markets will continue to be driven by uncertainty and volatility. Having said that, investors who don’t participate in sound, long-term equity investing are missing out on a wealth-building opportunity. If you check historical records, you’ll find that the average annual return for the S&P 500 has been about 10% since its inception in 1928 through 2014.
At BLACK ENTERPRISE, we have always advocated in investing for the long haul. In fact, we have made it one of our “Wealth for Life” principles: Â I will devise an investment plan for my retirement needs and children’s education.
As people take note of this historic milestone, it is a good time for us to give you some down-to-earth investment advice regardless of market activity. Based on our interviews with countless investment experts over the years, we share these basic but powerful strategies for investing in any market:
1. Don’t Time the Market
In other words, you shouldn’t become too exuberant during huge market advances, like the one we witnessed on Tuesday, or panic during market dips like those days before the election.
Our rule-of-thumb: engage in disciplined, long-term investing. It’s true the past can never fully predict future outcomes, but it serves as a valuable reference. Gain professional advice on how to build a long-term portfolio, based on your risk tolerance level and financial goals.
2. Engage in Dollar Cost Averaging
By investing equal dollar amounts at regular intervals, it enables you to purchase more shares of quality companies when the stock price drops, which is a likely event in today’s capricious market. In fact, most mutual funds can be set up as automatic investment accounts.
We also can’t stress enough the value of contributing to employer-sponsored 401(k) and 401(b) plans. It’s a systematic way to build your retirement nest egg. As many of you know, funds are deducted from your paycheck, and you get to invest in an array of investment offerings with tax-free dollars. An added bonus is that, in many cases, your employer will match a portion of your contribution–the maximum is currently $18,000 per year.Â Since these tax-deferred vehicles are designed for retirement, you’ll face stiff penalties and tax liabilities if you withdraw funds before age 59 and a half.
3. Look for Dividend Stocks
With the increasingly unpredictable environment, consider purchasing shares of companies that make cash distributions to shareholders on a quarterly basis. These stocks tend to be high-quality blue chips that can provide you with additional cash flow from a yield of 2% to 3%. Moreover, a regular dividend may provide downside protection.
4. Invest in What You Know
It’s the tried and true process of spotting opportunities by targeting familiar companies, industries, and products. They tend to beÂ market leaders with powerful brands, top-shelf management, and best of all,Â you will already understand their products and business models.
5. Protect Your Portfolio by Getting Defensive
As the economy continues its excruciatingly slow mend, look for stocks that perform in any market. Pharmaceuticals, personal care, household products, food and consumer staples–products consumers purchase in economies weak or strong–will buoy your holdings.
6. Develop an Asset Allocation Strategy
Diversifying your investments among two or more asset classes can help you stay in for the long haul. One approach, if you don’t want to manage your own asset allocation, is to invest in so-called target date funds. If you’re about 20 years from retirement, for example, you might pick a fund with a 2035 target date. These funds can provide investors with an appropriate asset allocation for their time horizon, and they automatically change the mix to become more conservative as the target date approaches.
Moreover, regularly monitor your equity portfolio and make adjustments across sectors. For instance, gain some foreign exposure; a good rule-of-thumb is to place between 20% and Â 30% of your equity holdings in international stocks.