The stock markets (all of them) continue to soar to new heights. Since the presidential election, the Dow Jones Industrial Average is up 14.5%. Several experts are a calling for the market to give back these gains and then some. One advisor has called for the stock market to fall as far as 11,500 a drop of 44% from the current level.[1] Another has called for a “$68 trillion biblical collapse.”[2] Finally, one economist has said the stock market is currently 80% overvalued.[3] Scary.
Is it wise to sell your investments and ride out the coming stock market decline?
Let’s look at some history.
The Standard & Poor’s 500 Index is up 20% on a year over year basis. For the past five years, it’s up 93.3%. During the last fifteen years, it has gained 173.2%. Over the past twenty years it has risen 321%. For the record, the stock market has never fallen 321%!
Looking back to 1987, a portfolio owning the Vanguard S&P 500 Index Fund and the Vanguard Total Bond Fund generated a total return of 977%. A $100,000 investment is now worth $1,075,000. During the past thirty years, this portfolio’s best year was in 1995 gaining 27.80%. 2008 was the worst year as it dropped 16.57%. In this simple portfolio, you own some of the markets best performers including Apple, Microsoft, Amazon, Berkshire Hathaway and Facebook.
What should you do as the market continues to climb to new heights? Here are few suggestions.
- Nothing. You don’t have to do anything. History tells us that time in the stock market is the best way to create a mountain of money and produce generational wealth.
- Diversify. If 100% of your money is invested in the Dow Jones or S&P 500, move some of it to other investments like small companies, international companies or bonds.
- Plan. What does your financial plan say? Have you arrived at your financial destination because of the markets rise? If so, sell some of your equity holdings to reduce your risk exposure.
- Buy. If the market does drop 20% or 30%, then buy the dip. Adding to your equity holdings when the market drops has proven to be a prudent financial strategy.
- Give. If you have benefited from the rise in the market, take some gains and donate the money to your favorite cause.
Of course, no one knows what the stock market will do or when. The best strategy is to focus on your goals, save your money and think long term.
Predicting rain doesn’t count. Building arks does. ~ Warren Buffett.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com.
February 14, 2017
Note: Your investment returns may be more or less than those posted in this blog. Past performance is no guarantee of future results. The financial data has been generated from the Morningstar Office Hypothetical Tool as of 2/14/17.
[1] http://www.cnbc.com/2016/06/22/dow-11500-is-a-matter-of-when-not-if-advisor.html, Michelle Fox, June 22, 2016,.
[2] http://thesovereigninvestor.com/exclusives/80-stock-market-crash-to-strike-in-2016/, JL Yastine, January 30, 2017.
[3] Ibid.