By Jill Schlesinger
Tribune Media Services
Has the magic worn off? Despite all of the fanfare and fancy graphics from financial outlets, the public reaction to the Dow Jones Industrial Average reaching a new all-time nominal high seemed downright muted. Or as a recent radio caller said, “The record didn’t feel as good this time around!”
Well, why not? It probably has a lot to do with what has happened over the past 5 1/2 years since the Dow last made history. When the blue chip index first closed above 14,164 in October 2007, the nation’s unemployment rate stood at 4.7 percent – today it’s 7.7 percent. Since then, average home prices have dropped about 25 to 30 percent, and the average price for a gallon of regular gas is about a dollar higher. For those still working, the January 2013 median income stood at approximately $51,600, which is 6.2 percent lower than the median of $55,000 in December 2007, which was when the Great Recession began.
Then there’s the number itself. You probably heard a lot about the Dow’s “nominal” high, which is a measure that has not been adjusted for inflation. When we factor in the rate of inflation, the Dow would have to climb to 15,731.54 to truly break the record – in fact, the Dow is still well below it’s year 2000 peak!
Additionally, there are some problems with the index itself. The Dow is comprised of just 30 companies, so it’s not as good of a representation of the broader market as the S&P 500 or the Wilshire 5000. Also, math heads point out that the way the index is calculated does not make a lot of sense. Dow components are weighted by their share prices, rather than their market valuation (number of shares outstanding multiplied by the share price). That means that a company like IBM with a high share price can have a larger impact on the index than Exxon Mobil, which is the largest U.S. company by market capitalization.
Index quibbles notwithstanding, almost every large stock index is reclaiming previous high nominal levels, and yet the reaction is not nearly as euphoric as the first time around, even to sophisticated investors.
Perhaps the bruising bear market took a lot out of all investors, but it could be that there’s another trend at work: Many investors have missed the big recovery in stocks. According to the Investment Company Institute, investors got spooked by the gyrating markets and have pulled over $550 billion dollars from U.S. stock mutual funds over the past 5 1/2 years.
While many investors are sitting atop a great deal of cash, and bond investors are tempted to jump back into stocks, let me offer some words of caution: Buying stocks simply because the indexes are higher could be a recipe for disaster.
The flip side of the emotional cycle is also true: You don’t want to sell stocks just because the index dips. Instead of trying to predict market highs and lows, use these market events (new high levels, new round numbers) to prompt action. Start by opening your statements to review where you stand. Make sure that your risk level is consistent with your comfort level.
If you have been investing in the stock market throughout the recovery, there’s no reason to wait for the market to drop to consider selling. Try to force yourself to rebalance in accordance with your goals, which may help you sell high and buy low. Finally, don’t forget to beef up your cash for near-term funding needs, like tuition bills, a car purchase or a home down payment.
Higher stock prices should be celebrated for what they can do for your financial life, not for any records they (sort of) break.
Jill Schlesinger, CFP, is the Editor-at-Large for www.CBSMoneyWatch.com. She covers the economy, markets, investing or anything else with a dollar sign on her podcast and blog, Jill on Money, as well as on television and radio. She welcomes comments and questions at askjill@moneywatch.com.
This was printed in the April 7, 2013 – April 20, 2013 Edition
