TRUCKEE, Calif. — Recently, the Dow Jones Industrial average has soared to record highs. The old highs were set back in 2007, prior to the 2008 recession. On Friday, March 8, the Dow went above 14,400 for an all-time record high. The old high of 14,164 was set on Oct. 9, 2007.
When the housing bubble burst, the market declined and finally bottomed at 6,594 on March 5, 2009. There’s a good lesson in market volatility here. Many people will say to buy and hold for the best results. If you had bought a fund that mirrors the Dow at the old high on Oct. 7, 2009, and held it, you would have seen your investment decline by more than 50 percent and would just now be getting ahead after over five years.
If you were fortunate enough to buy near the bottom on March 5, 2009, your money would have more than doubled in four years. One good rule is to average money into and out of the market. These types of price swings can be very frustrating for investors.
The S&P 500 is not quite at its all time high yet. It still needs a move of about 1 percent to break its all time high record of 1,576 set on Oct. 11, 2007.
The NASDAQ is another story. It’s all time high was on March 10, 2000, w
hen it hit a level of 5,132. The NASDAQ Index consists of many technology stocks that declined seriously when the dot com bubble burst. It is 13 years later, and the NASDAQ is now at 3,244. If you had been unfortunate enough to buy into the NASDAQ index at its peak in 2000, after 13 years you’d still be down by more than 35 percent.
While it’s great to see the markets finally break out to new highs after so many years, I think that a lot of investors are still reeling from the experiences of 2008 and 2009. There are a lot of lessons to be learned here. Money that’s in the stock market should be long-term money, not funds that you may need to access in the short term.
It’s important to understand you own risk tolerance and have a plan in place for what to do in the event of a major market downturn. Understand the choices available to you to hedge your portfolio against catastrophic risk, known in the industry as tail risk.
Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.