As many of you may have heard, the Dow Jones Industrial Average hit an all-time high last week. The S&P 500 is near an all-time high as well. What does this mean? Well, all it really means it that stocks are more expensive than they’ve ever been. It doesn’t signify anything good or bad about the future prospects of investing in stocks, though many news outlets would like you to believe as much.
Here’s what I believe, based on the empirical evidence available. It is impossible to predict the future short-term movements of the stock market. It’s therefore pretty useless to use the above information, or really any current economic information, as a basis for your financial decisions. In fact, doing so will likely cause more harm than good.
What is clear, however, is that the news outlets and the financial “experts” they often feature feel that you absolutely can use the present state of things as a gauge for the future. The way this often plays out is that the popular news sources are most optimistic for the future after a strong recent run. And given that the stock market cycles up and down, this often coincides with what will soon be a drop in the market. And the opposite is also true. The news is often most pessimistic after a poor recent run, just before the market starts to cycle back up again.
So when I saw this article the other day, I wasn’t the least bit surprised. Basically, there’s a company that surveys professional money managers to get a sense of their current business conditions. What they found recently is that their clients currently have a higher risk tolerance and have more money allocated to stocks than at any time in the recent past. In other words, people are excited about jumping into stocks at the exact time when stocks are at their all-time most expensive.
Now, again, I’m not trying to predict the future. The stock market could continue to rise for several years, making these people a good amount of money. But from where I’m sitting, this simply looks like a repetition of the same mistakes people have been making for years. The stock market drops and they pull out, selling low. Then the stock market rises for a period of time, finally reaching a high point, upon which people decide they are ready to get back in. Buying high, selling low. Just another day at the office for the typical American investor.
So how can you be different? Spend some time making a simple financial plan. Determine how much you can save, where you want to save it, and how you will invest it. Set up this plan to run automatically, so that you can spend your time focusing on the things you care about, like building forts with your kids. Check in every now and then to make sure your plan is still running smoothly, but other than that don’t spend time worrying about it. The current price of the stock market, the expert of the day’s view of our economic future, none of this has anything to do with your plan for your and your family. Tune it out, and know that most of the time the predictions you hear today will be wrong.
Make a plan. Keep it simple. Automate it. Repeat. That’s the key to long-term financial success.