Broker Check

What Dow 17,000 Means for Your Investment Strategy

by Howard Hook, CFP®, CPA

As published in New York Daily News “Money Pros” on July 7, 2014

So long as you have a long-term investment time horizon, it’s not too late to invest.

Question: The Dow just finished above 17,000 for the first time. Is now a good time for me to jump into the stock market or have I missed my chance?

Answer: While everyone has an opinion on the market’s future, no one can offer any guarantees. Rather, to answer this question, you need to begin by asking yourself what your time frame is for needing the money you plan on investing. The good news is that as long as you have a long-term investment time horizon in mind, it’s not too late to invest in the stock market.

Markets tend to move higher when investments can be maintained for longer periods of time. For shorter time periods, there is a much greater chance that the markets might not perform as well. Once you decide that you want to invest in the stock market, you next need to decide on the best way to go about doing that - whether it’s in a lump sum or over a period of time.

Investing it all in one lump sum will look good if the markets continue to go up. However, you may rue your decision if the markets decline right after you make your lump sum investment.

One way to ease the pain of having invested in the market only to see it immediately go down, is to “dollar cost average” instead of investing the entire lump sum. Dollar cost averaging means breaking up the lump sum into several pieces and investing those pieces into the stock market over a pre-determined period of time. For example, investing $10,000 on the first day of each month into the stock market over a twelve-month time period can help mitigate the risks of a decline in the market at the beginning of the investment period. This is because you will have invested less after one month in the market ($10,000 vs. $120,000). Each month that goes by, you will invest an additional $10,000 in the market, increasing your stock market exposure. The key, however, is to continue making the monthly purchases regardless of whether the market declines. Of course, if the market were to increase while you were dollar cost averaging, you would lose out on some of the appreciation you would have had if you invested the entire lump sum at once. Think of dollar cost averaging as insurance against an immediate market decline.

Another way to reduce the risk of a near-term decline in the Dow is to get broader exposure to the equity market by investing in mid- and small-cap stocks and international stocks rather than just the large caps represented in the Dow Jones and S&P 500. These different types of stocks provide further diversification and downside protection in the event of a market decline.

Finally, the best way to protect against a decline in the stock market is not to invest all of your assets in the market. Proper diversification of your investments into stock and bond investments can help reduce your risk while potentially allowing for better returns for your overall portfolio.