Dow 15,000 – Where Do We Go From Here?

by Kevin on August 8, 2014

Do you remember the “New Paradigm”? Back in the late 1990s – when the stock market stair-stepped its way to new records on an almost monthly basis – economists coined the term as a way to explain why the economy would continue expand and the financial markets would continue to rise without limit. Now is a good time to dust off that description. It may be relevant today.

We are now in a similar situation to the late 1990s – the stock market is once again setting new records on a continuous basis. In the latest bust-boom sequence, the Dow Jones Industrial Average has risen from a low of 6547 on March 9, 2009, all the way up to the 15,000 level now. That’s an increase of 230% in only a little over four years!

Does Dow 15,000 mean that now is a good time to begin changing strategies? I think so. That doesn’t mean that the market is due for crash, but we have had a stinking good run over the last four years and – just like in the past – we should not expect that to continue forever.

Some modification of investment strategy is in order.

Cut back on your stock positions…

What often happens when the equity markets go on a tear, as they have for the past few years, is that portfolios become overweight in stocks. After all, stock prices have exploded, while cash and fixed income instruments have stagnated collecting very little in interest income.

What might have been a 50% stock allocation back in 2009, may now have grown to 80% or 90%, primarily on the rise in stock prices alone. In addition, when stock prices rise so steadily there’s a tendency to pour more money into them looking for even greater gains.

Dow 15,000 is an excellent time to begin gradually reducing those positions. If 80% of your portfolio is in stocks you may want to begin gradually trimming that back down to 60%, or some other number that makes more sense on a long-term basis.

…but don’t get out of the market entirely

While you are trimming your stock holdings, you also want to be careful that you don’t over-react and sell off too deeply. The stock market could continue to rise for another year or two, for all of the same reasons that it has since 2009. You would not want to miss out on those gains should that happen.

This will probably be an excellent time to shift your equity holdings into index funds too. As bull markets mature, rising niches become harder to spot. In addition, when the market turns, managed funds and sector funds are usually hit much harder than the general market. Index funds could be a good choice to soften the blow should the market turn negative.

Cash is a good place to be

If you are reducing your equity positions, most of the funds that you are freeing up should be going into cash and cash equivalents. Not only will cash holdings provide the best possible diversification in the event of a market decline, but it will also enable you to have investment capital available to buy stocks at lower prices later.

Cash may be seen as boring, but when bull markets get a little bit long in the tooth, cash becomes a true strategic asset. Your cash holdings should be seen as a way of positioning yourself for the next turn in the market.

And so are income stocks

When stock prices fall, the focus in the investment universe moves to income. Now is a good time to look for high dividend paying stocks. You might look at blue chips, utilities, and preferred stocks for above-average income.

Not only will income stocks provide you with a cash flow during a weaker market, but that income can also provide a “floor” under the price of the stocks. The prices of income stocks can fall only so far before their yield will move to well above market, and then investors will flood in to take advantage of those higher returns. That influx of cash will help to support the price of the underlying income stocks.

Remember the gold bloodbath in April?

Now that gold has seen its first significant reversal since the early 2000’s, it’s easy to forget that it has also been perhaps the best performing asset in this century. The price hit that gold took in April might actually make it more attractive to buy right now.

Whenever investment prices become too rich, such as is the case with the current stock market, it’s time to start looking at undervalued assets. The recent sell off in gold probably qualifies it for this status. You don’t want to put too much of your portfolio into gold – not the least of which because it might actually follow stocks down – but since it’s price has already reversed, the potential is real for it to lead other assets in a price rebound sooner or later.

No matter what, the record level of stocks is a definite sign to begin expanding diversification efforts. That will include cash, income stocks, and gold. If you can begin increasing your positions in these assets, while still retaining a large position in the general equity market, you will be on solid ground for whatever happens in the investment markets.

Is the record level of the stock market causing you to re-evaluate your investment portfolio?

Google+ Comments

Related Posts