Dow hits new highs: Should you sell?
(MoneyWatch) The Dow Jones Industrial Average hit a new nominal (not adjusted for inflation) intraday high, of 14,286.37, above 14,198.10 for the first time since on Oct. 11, 2007 and settled at a new closing high of 14,253.77, taking out the Oct. 9, 2007, level of 14,164.53.
You are excused if you don't feel like popping the champagne corks. After all, it has taken a whopping 5 1/2 years to get back to that level and in between, the economy suffered the worst recession since the Great Depression and the stock market fell over 50 percent. In fact, it's almost the four-year anniversary of this cycle's stock market low, reached on March 9, 2009. Since then, indexes have more than doubled:
- DJIA: 6,547 (lowest point since 4/15/97)
- S&P 500: 676 (lowest point since 9/12/96)
- NASDAQ: 1,268 (lowest point since 10/9/02)
What has driven stocks to these lofty levels? There are a myriad of factors that have contributed to the stock market's recent leg-up, including: Europe is not currently on the precipice of disaster; China appears to have avoided the much-feared hard landing, at least for now; Japanese officials have started to address the country's 20-year economic stagnation; corporate America continues to post solid earnings results; and U.S. housing is finally contributing to economic growth. But the biggest driver of the stock market's advance is the Federal Reserve, which has kept short-term interest rates at historic lows since December 2008 and last September launched a third round of bond buying (QE3), where it would purchase $85 billion worth of bonds at least until the unemployment rate drops to 6.5 percent.
All that said, stocks continue to rise, fueling our obsession with round numbers (Dow 15,000 is next!) and records. Just like you don't want to cash out at the bottom, you also want to avoid piling in at the top. One way to help you avoid knee-jerk, emotional trading decisions is to force yourself to rebalance when markets are at high levels, like they are today. Here's what you should do:
- Open your statements
- Review where you stand
- Take a risk assessment quiz
- Re-balance accounts according to your personal goals
- Beef-up cash holdings for any near-term funding needs (tuition, car, house down payment)
If you work with a broker or an advisor:
- Schedule appointment to review progress
- Confirm how much service costs
- Review and update your plan
- Consider replacing managed funds with lower cost index funds or ETFs