The Dow Jones Industrial Average, the best-known measure of the stock market, recently closed at a record high.
For some investors, this was a cause for at least mild celebration. For others, it might have brought back painful memories and triggered the urge to take a break from investing. But that's a vacation you shouldn't take.
Many of today's investors were also investing in the late 1990s, a period when the "dot-com" boom drove the market to new heights. But when the technology "bubble" burst in early 2000, stock prices dropped sharply, and a lot of people lost a lot of money.
Now that the stock market has, after nearly seven years, gained back all the ground it lost, it may not be surprising that some people fear history, in the form of a lengthy market decline, may repeat itself.
Before that happens, they reason, they can protect themselves by heading to the investment sidelines. This type of thinking is an example of "market timing," a strategy that can be summed up in this well-known phrase: "buy low, sell high."
And that's really good advice, except that it's almost impossible to follow. No one can truly know when the stock market is "high" and when it is "low." If you try to make these judgments, and you jump in and out of the market, you could pay a heavy price. Consider the following:
* If you had invested $10,000 in the Standard and Poor 500 from 1996 through 2005, and you stayed invested for the entire 10-year period, your money would have grown to $20,802.
* If you had missed just the 10 best days of market performance during that time, your $10,000 would only have grown to $12,273.
* If you had missed the top 40 days, you would actually have lost money, and your $10,000 would be worth only $4,082. (Keep in mind, however, that the S&P 500 is an unmanaged index, so you can't invest in it directly. Also, past performance is not an indication of future results.)
While the results for any 10-year period may differ substantially from these, it seems clear that taking a "time out" from the market can be costly.
Furthermore, some evidence suggests that you might have less cause to fear a sharp market drop now, than was the case in January 2000.
Back then, for example, stocks in the S&P 500 index had a price-to-earnings multiple of 30, compared to just 17 today.
As an investor, you generally don't want to see a high P/E. A high P/E implies that a stock's earnings may not be sufficient to sustain the stock's price. And, in fact, that was exactly what happened in 2000: the dot-com stocks' earnings were low, and in some cases, nonexistent. The skyrocketing stock prices could not possibly last.
Also, measures such as earnings per share and dividends per share are much higher today than they were in 2000. These measures, along with todays relatively low P/E, all point to a stock market that is a much better value than the overpriced market that existed in January 2000.
No one can say for sure where the market will go from its current high point. But one thing seems clear: If you're going to work toward long-term success, you need to stay invested for the long term.
Sally Stahl is an investment representative with Edward Jones. Contact her at (561) 748-7600.