Buy or Sell? What You Should Consider First
Time to jump into the stock market with both feet?
Or a better time to walk away?
For individual investors, the Dow’s surge past the 10,000 mark might logically provoke either sentiment.
On one hand, Dow 10,000 could refocus investor interest on the stock market’s potential--especially among the ranks of nervous small investors who have been parking record amounts of cash in safe but low-yielding money market mutual funds since last summer.
“It will certainly get their attention,” said Culver City financial planner Gary Caine.
Or maybe it already has: If current buying trends continue, the nation’s stock mutual funds are likely to see $20.6 billion in net new money invested in March, versus estimates of net redemptions in February, according to Santa Rosa-based research firm Trimtabs.com.
“The crossing of that 10,000 barrier is purely psychological,” said West Los Angeles certified financial planner Joel Framson. “But people on the sidelines may now feel compelled to jump in because nobody wants to be left behind.”
Other investors, however, may well see 10,000 as the ultimate symbol of overpriced blue-chip stocks in the midst of a weak stock market overall.
This is still a “very, very narrow market,” argued Meloni Hallock, a partner at Ernst & Young’s financial counseling group in Los Angeles. While the 30-stock Dow has surged 9% so far this year, many small-company stocks have fallen further in price, which is reflected in the 5.3% year-to-date decline of the Russell 2,000 small-stock index.
“I’m always happy to see the stock market go up,” said Michael Diehl, 48, a self-employed Glendale resident who invests mostly through mutual funds. “But the fact that the Dow hit 10,000 is really immaterial. I’d be more impressed with Dow 10,000 if the market as a whole, not just a small group of big stocks, were going higher.”
Rather than asking whether to buy or sell stocks because the Dow crossed 10,000, investors ought to regard the event “like a car that just hit 30,000 or 40,000 or 50,000 miles,” said Costa Mesa financial planner Glenn Woody.
“From a fundamental standpoint, there’s no difference in your car’s engine when you drive past 50,000 miles and [when] the odometer reads 50,050,” he said.
Reevaluate Your Mix
But the Dow’s landmarks can serve as timely reminders that you may need to inspect your portfolio, if not tune it up. Specifically, it may be time to think about re-balancing your portfolio if you haven’t done so in at least a year--to make sure that you’re invested in the proper mix of stocks, bonds and cash (as well as proper types of stocks and bonds) to meet your short- and long-term financial goals.
For example, you may want to consider your mix of large- and small-company stocks.
Many financial pros believe you should have a stake in both large and small stocks at all times, precisely because they don’t move in lock step and it’s difficult to know when one group will suddenly become favored.
If you haven’t checked your allocation between large and small stocks in recent years, you may find that the percentage of your portfolio in small stocks has dwindled considerably as big stocks have rocketed in value.
For instance, let’s say that on April 6, when the Dow was at 9,000, you decided that a 60%-40% mix between large stocks and small ones was appropriate for your goals.
Since that time, while the Dow has advanced nearly 11%, the Russell 2,000 index has dropped 17%.
Assuming you had $100,000 to start with, your $60,000 stake in large stocks would have grown to $66,600, while your small-stock holdings would have shrunk to $33,200. In other words, your mix would have gone from 60%-40% to 67%-33% in less than a year.
Re-balancing--by taking profits in big stocks and in turn buying small stocks--would restore your desired mix.
What about tapping your cash reserves to buy more stocks?
Louis Barajas, a financial planner in Commerce, says that if you’re thinking about employing new cash in the stock market you shouldn’t be watching the Dow. Rather, you should be asking yourself, “What’s the money for and what’s my time frame?”
Putting additional money into stocks right now might not be appropriate if you know you’ll need that money within two years--for instance, to put a down payment on a house or to pay for your child’s college bill, planners say. There’s too great a risk of a significant market loss within two years.
Conversely, if you have more than a decade or two before you’ll need the money, and you sense that you’ve been playing it safer than you should have by keeping too much money in cash over the last year, this might be an appropriate time to think about adjusting your asset allocation in favor of stocks.
Consistency May Be Best Strategy
But what about the concept of buying low and selling high? Isn’t the fact that the Dow reached 10,000 a sign that the market is nearing some major top?
“Remember when the Dow hit 900 in the late ‘70s and people were so afraid of a collapse?” asked Mafi George, 46, a mutual fund investor who lives in Palos Verdes. “Dow 10,000 doesn’t frighten me at all. It’s just another number.”
And it really may not matter much--even though stocks are richly valued--if you have a long-term view.
A study by the Charles Schwab Center for Investment Research found that even if you have the bad luck of investing at market peaks each year, it won’t necessarily wreak havoc on your portfolio--so long as you invest consistently.
Schwab used an example of an investor who received $2,000 each year from Dec. 31, 1976, through Dec. 31, 1996. If that investor put the money into the Standard & Poor’s 500 index of blue-chip stocks on Dec. 31 of each year, he or she would have ended up with roughly $265,000 in 20 years.
If the investor had the misfortune to invest the $2,000 at the highest monthly close for the S&P; 500 each year, he or she still would have wound up with about $242,000, or 9% less.
Said Barajas, “There’s never an absolute right time to buy, and there’s never an absolute wrong time to buy.”
