The market (Dow) closed today (Friday the 25th of January) at 13,895.98 near the market peak of 14,164.53 on October 9th 2007. This means the Dow is now within 268.55 points of that record high (or under 2% within the record … certainly within reach of going over the record). Emotionally, this appears to be cause for celebration right? Why not, your broker is now a hero because the market is up right?
But wait. Did your broker really have anything to do with getting back near the market highs? Or was that more a result of what the markets did? Who or what is “the market” anyway? And finally, just what did happen to the Dow the last time we reached a high?
Not to put a wet blanket on the party, but if you are using this as a signal to get more aggressive or get back into the markets, or to buy more now … guess what … you may have missed the party!
This is NOT to say stop investing. I’m simply saying that when prices are higher you buy less than when prices are lower. I refer you to the chart in the Cycle of Market Emotions blog I wrote before. When emotions are the most jubilant often coincides with the times when the markets are at most risk of taking back what they have given.
We are now at the opposite end (again) of the emotional and numerical realities of the market bottom when the Dow was at its lowest of 6547.05 on Mar 9th, 2009. Get my meaning … the worst feelings we had about our net worth and portfolio values, yet precisely the time when risk was at its lowest. Of course we don’t know this until in hindsight … but that is true of anything about the future.
Morals of the story: often our emotions are 180 degrees opposite of what the true risk is when it comes to markets. And secondly, the broker has nothing to do with what happens in the market because the markets are made up of ALL participants and the sum of ALL their actions. No one person has that influence. Finally, when you realize both of these story morals, you realize the difference between what you can and can not control. You can control how much you save and invest (or spend); you can not control the markets.
So should you be euphoric or fearful? Balance is the answer so that you are properly prepared for the unknown that inevitably comes next. Portfolio construction should have parts for all types of markets; not just for the panic or euphoria of the moment.
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