Don’t go to the sidelines after market high
The Dow Jones Industrial Average the best-known measure of the stock market this week closed at a record high. For some investors, this was a cause for at least mild celebration. For others, it might have brought back painful memories and triggered the urge to take a break from investing. Thats a vacation you shouldnt take. Many of todays investors were also investing in the late 1990s, a period when the dot-com boom drove the market to new heights. But when the technology bubble burst in early 2000, stock prices dropped sharply, and a lot of people lost a lot of money. Now that the stock market has, after seven years, gained back all the ground it lost, it may not be surprising that some people fear that history in the form of a lengthy market decline may repeat itself. Before that happens, they reason, they can protect themselves by heading to the investment sidelines. This type of thinking is an example of market timing a strategy that can be summed up in this well-known phrase: Buy low, sell high. And thats really good advice except that its almost impossible to follow. No one can truly know when the stock market is high and when it is low. If you try to make these judgments, and you jump in and out of the market, you could pay a heavy price. Consider the following: If you had invested $10,000 in the S&P 500 from 1996 through 2005, and you stayed invested for the entire 10-year period, your money would have grown to $20,802. If you had missed just the 10 best days of market performance during that time, your $10,000 would only have grown to $12,273. If you had missed the top 40 days, you would actually have lost money, and your $10,000 would only be worth $4,082. (Keep in mind, however, that the S&P 500 is an unmanaged index, so you cant invest in it directly. Also, past performance is not an indication of future results.)While the results for any 10-year period may differ substantially from these, it seems clear that taking a time out from the market can be costly.Furthermore, some evidence suggests that you might have less cause to fear a sharp market drop now than was the case in January 2000. Back then, for example, stocks in the S&P 500 index had a price-to-earnings multiple (P/E) of 30, compared with just 17 today. As an investor, you generally dont want to see a high P/E because a high P/E implies that a stocks earnings may not be sufficient to sustain the stocks price. That was exactly what happened in 2000: The dot-com stocks earnings were low and, in some cases, nonexistent so the skyrocketing stock prices could not possibly last. Also, measures such as earnings per share and dividends per share are much higher today than they were in 2000. These measures, along with todays relatively low P/E, all point to a stock market that is a much better value than the overpriced market that existed in January 2000. No one can say for sure where the market will go from its current high point. But one thing seems clear: If youre going to work toward long-term success, you need to stay invested for the long term.Charlie Wick, Tina DeWitt, Jessie Steinmetz and Todd DeJong are financial advisers with Edward Jones. They can be reached in Eagle at 328-4959, in Edwards at 926-1728, in Gypsum at 524-1510 and in Avon at 845-1025.