When I was a practicing advisor, today was a big day for short emails from clients that generally ran like this:
I saw the Dow Jones hit a new high today. Should we invest more money?
FYI: If you ask your financial advisor if you should save more money, the answer is, of course, nearly always a resounding “yes.” (Though I did have the occasional oversaver that I had to consistently convince to go spend some money.)
However, the Dow Jones Industrial Average reaching a new high shouldn’t be the reason to save more money. Save more because:
– You have future plans (retirement, education, house, car) that require money
– Your plan is dictating where your savings should be invested
Before you invest in an all-time high market, ask yourself this question:
Why Is The Dow Jones at Record Levels?
The Dow Jones hit a new high yesterday because the Federal Reserve decided to continue purchasing Treasuries. In effect, interest rates will remain low longer because the Fed will continue purchasing bonds, driving prices up. Because bonds are sold at auction, higher prices mean that the government has to pay a lower interest rate on the debt.
That begs some questions:
– Do you think the Fed will continue buying bonds forever?
– What happens to the market when they discontinue this practice?
If you think about the mechanics of “why” the Dow hit a high, you should have the exact reverse thought of “Should I invest.” If I were to imagine an analogy it would be this: This market moved higher yesterday because your drunk uncle who owns the store decided to give you, the employee a raise.
Sadly, we know that your drunk uncle will wake up this morning and have little remembrance of why you were his buddy yesterday. We also know that he can’t go on with this hard living forever. At some point, he’s going to have to reverse course (as will the Fed). When this happens…and neither you nor I can predict the date, we’d better be ready.
What does “be ready” mean?
First, here’s what it doesn’t mean: It doesn’t mean to panic or remove all of your money from the financial markets. If your funds are invested with a long term plan in mind, you should do nothing with existing funds outside of rebalancing your portfolio.
Here’s what I DO mean: If you’re ready today to be more aggressive, thinking about writing your advisor and asking him/her “Should we invest more money?” I’d recommend against it. The day to ask “should we be more invested” is when this drunk uncle of a market is on the decline.
Are you looking for ways to save more money? Check out OG’s good read on our sister site: Why You Need to Save Another 1 Percent Right Now.
Some big “Thank You” shout outs:
– Thanks to Lance at MoneyLifeandMore for mentioning the StackingBenjamins podcast in his piece Flood Insurance Rental Property Surprise – What New Landlords Need to Know.
– A big thank you to PK at DQYDJ.net for mentioning his podcast discussion in his piece Why Do Some People Assume Math is Magic?
– Thank you to Alexa at Single Mom’s Income for mentioning our iPhone comparison post on her Freelance Jobs piece.
Today’s Workout: 9 mile tempo run
Day’s I’ve Run In a Row: 359
On My iPod Today: Moneyplan SOS podcast: 4 Steps to Making Smart Purchasing Decisions
Given how the markets react every time the stimulus is unchanged, I can’t see anything but a very aggressive negative impact when tapering is begun.
It amazes me how people use historic highs as being a reason to buy an investment. In the artificially created highs of today, this just seems like financial suicide.
I’m hoping for a smooth landing, but the longer this goes, the more I worry that you’re right. This is your pilot speaking: it may get bumpy ahead…..
I agree with this completely, though dollar cost averaging over time suggests it will all work out, right?
No problem Joe! While I was happy my retirement portfolio went higher yesterday, I know in the long run it doesn’t matter. I can’t touch that thing for 30+ more years… so the Fed buying bonds will have a very small effect on it over that time frame. I’d imagine we’d be well past that by then.
Agreed. Why play games with money when statistically you know that humans make horrible timing decisions anyway?
Matt @ momanddadmoney
“Hey, that thing I want just went up in price? Now is the perfect time to jump on it!”
I’ve never understood it. I don’t know if you work with clients, Matt, but if you do, you know exactly what I’m talking about. Nice people who definitely need some coaching.
Love the drunk uncle comparison! My first thought yesterday was do I have anything I want to sell! Sadly the reason most people struggle to make what the market does is because of this exact problem, buying on the high side and selling when it is crashing!
Done by Forty
Not to time the market, but do you believe we should keep a little powder dry to make a large purchase on a dip, or is that always just a bad idea? Just keep dollar cost averaging through it all?
Great thought. I love to have some cash for opportunities in my portfolio. As I mentioned to Charles, I also like to bump my allocations toward out-of-favor areas so I don’t have to try and time. By going from 5% to 10% in emerging markets I’m taking advantage of lower prices while not having to bet when the best day will be for these investments. I’m getting ready to do the same with bonds, too!
I continue to invest in the market (as well as in real estate and P2P lending) because there aren’t too many decent alternatives at this point. I can’t wait until interest rates go through the roof so that I have a more productive place to park my money!
Mike, I think you speak for about 99% of the world on that one! CD and bond investors are getting burned at the stake….
Everyone loves the US and hates emerging markets and international markets. The US can’t outperform forever so I’ve been buying other countries.
Jeremy Siegal a Wharton professor thinks the market can hit 20,000 so we’ll see, although market highs do make me feel better.
We’re talking about getting Siegal on our podcast. I’ve seen him live and he’s a great speaker.
This is clearly the time to buy emerging markets. They haven’t gone away forever, and historically, when they come back, they roar. I’m with you….my asset allocation toward emerging markets has moved from 5% to 10% of my portfolio recently as they underperform.
Kayla @ I've worked too hard t
I’m just getting into investing in the markets more, but I got past the idea of getting ‘lucky’ or hitting rich quick with the market pretty fast. I now invest in the slow moving, but sturdy businesses that have a fairly consistent gain. (like GE for example). I’m using it as a means for long-term saving for my future, or even a larger emergency. My funds are small now, but it’s awesome seeing them grow, even if only by several dollars each month.
Uncle Sam is the ultimate drunk uncle! Sometime I wish he would just let the chips fall where they may, but I guess that would be too much panic for us to handle.