Many of you have seen the news that the Dow Jones Industrial Average has hit a new milestone of 20,000. Before the presidential election, many people anticipated a falling stock market if Donald Trump were to be elected President but instead the market has rallied quite a bit since election day. So now many people ask what can be expected next.
The stock market is unpredictable and volatile in the short term and every day on TV business channels you will see respected analysts telling you that the market is set to fall while 10 minutes later on the same channel you will also see other respected analysts telling you that the market will surely rise. But none of them have a crystal ball and are only making their best guess. Who will be right? We can only know that in the future. However, what we do know, is that the stock market has historically risen over the long-term. Investors who are buying stocks to gamble on this week's results may suffer substantial losses. Those that are investing for long-term goals are likely to be rewarded with substantial gains but they may have to suffer quite a bit of volatility along the way.
The companies making up the U.S. stock market have earned hundreds of billions of dollars per year in most recent years. You may hear warnings that corporate earnings will be lower or higher and the stock market reacts accordingly but we cannot forget that companies as a group aren't suddenly losing billions of dollars; they are just earning a little more or a little less. Where a stock trades often seems to be disconnected with the fundamental value of a company. But over the long term, it generally catches up. As companies earn these hundreds of billions of dollars each year, it is reasonable to believe that long-term investors will be handsomely rewarded with gains in their stock portfolios if they have the patience and will to ignore short-term volatility.
The key to being patient, is to be invested properly for your personal circumstances such that a drop in the stock market does not affect your ability to meet your near-term needs. One should not be gambling with next month's mortgage payment. A prudent investment plan includes holding conservative assets for short-term needs, higher-yielding but only moderately risky assets for medium-term needs and then riskier assets such as stocks for only longer-term needs.
So if you have a proper investment plan and are invested appropriately for your circumstances, then where the stock market is going in the rest of 2017 should not be a concern. If you are invested properly, you can sleep well at night knowing that stock market volatility is the gamblers' problem but not yours.
I am happy to discuss your personal financial picture and help you be someone who can sleep well at night. And as always, I do not receive commissions or high, recurring fees so my advice always makes the Client the Priority.
- Larry Pike, CFA, Client Priority Financial Advisors LLC
- www.clientpriority.com
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