Why You Should Ignore the Hype About a Record-Breaking Dow
A record-breaking Dow Jones Industrial Average always makes all the headlines and gets everyone excited, but what does it mean for you? Nothing but a reminder to focus on your investment portfolio.
In February 2013, I wrote “Dow 14,000 – Big Deal or Just a Number?” when the blue-chip index surpassed its closing high back in the pre-recession days of October 2007. Late last month, the Dow climbed above the 18,000 mark for the first time ever.
The Dow fell back below 18,000 in the new year, and now yo-yos around that level. It will probably resume its mostly steady ascent at some point.
Just as I thought Dow 14,000 was a pretty meaningless number, Dow 18,000 doesn’t really matter, either. In fact, it’s not even a meaningful benchmark. The Dow has only 30 stocks – simply too few to reflect the market, while your portfolio contains a variety of stocks and bonds.
Rather than paying attention to the popular indexes, you should focus on your portfolio and your investment strategy. These are three specific steps you might consider taking.
1. Keep expenses low. While you can’t control the markets, you can control your investment expenses. Cutting down on fees immediately boosts returns. Look at all costs, such as mutual fund and exchange-traded funds (ETFs) expenses, custodian and advisory fees.
2. Rebalance your portfolio. You should review your overall portfolio annually or semi-annually to ensure that your asset allocation is still on target. Invariably, certain asset classes outperform or underperform. Over time, your account can drift away from your original allocation, and you need to rebalance it to mitigate investment risk.
For example, let’s say your target allocation is 60% stocks and 40% bonds. In a hot market, the percentage of stocks grows to 70%. You now have more risk than you want, if you don’t sell some stocks and buy some bonds to return to the original mix.
Bringing your portfolio back into balance means you have to sell off some winners. But market leaders and laggards shift periodically. Keeping an allocation that matches your risk tolerance is the safe thing to do.
3. Revisit your investment strategy. I view market highs as a great time to re-examine your financial plan to take account of your changing needs. When your financial goals change, so should your investment strategy. For example, if your investment timeline shortens (i.e., you need the money sooner), you cannot afford as much risk. You have to reconsider your holdings based on the new risk preference.
Is Dow 18,000 a big deal? Not in my book. I suggest focusing on the details of your portfolio and ignoring the hype. If you are fully and properly invested, it doesn’t matter what the market does over the short term.
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Roger Wohlner, CFP, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Please feel free to contact him with your investing and financial planning questions. Check out his Financial Planning and Investment Advice for Individuals page to learn more about his firm’s services. Roger is active on both Twitter and LinkedIn. Check out Roger’s popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans. He is also a regular contributor to the US News Smarter Investor Blog and has been quoted extensively in the financial press including The Wall Street Journal, Forbes and Smart Money. Roger is a member of NAPFA, the largest professional organization for fee-only financial advisors in the country. All NAPFA Registered Advisors sign a fiduciary oath promising to act in the best interests of their clients.
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