Back in 2010, I bet Len Penzo and Financial Samurai each dinner the Dow Jones Industrial Average would finish the year above 13,000. It was a very aggressive prediction on my part and it cost me a couple of dinners. This week, the Dow finally crossed the magical 13K mark and is holding steady. More impressive, the S&P 500 closed above 1,400 for the first time since 2008 and the NASDAQ composite closed above 3,000 for the first time since 2000.
What does this all of this mean for investors?
Happy Days are Here Again
For millions of people who remained invested during the 2008 crash, this means our investments are finally back near where they should be. Sure, we have lost four years, but at least the value has returned to our portfolios. In my case, I kept investing the entire time, so I dollar-cost-averaged my way to a tidy little profit. It’s also a little vindication for having faith in the market while others were bailing out with huge losses. It was hard for me to even watch the news in those days.
There is Nowhere Else to Go
One important factor propping up the stock market is the lack of other investment opportunities. Deposit investments, such as CDs and Money Markets, often yield below the rate of inflation. Treasuries and other bonds are so low, they could devalue significantly when interest rates rise. Gold and other precious metals are very high by historical standards. Right now, stocks are one of the best bets for investors looking for returns. This has a lot of income investors chasing dividend stocks.
Is the Bubble about to Burst?
Although investors seem to be getting nervous at these higher levels, the market is in pretty good shape. Unlike the bubble markets before 2000 and 2008, stocks have reasonable values based on their earnings. The P/E ratio of the S&P composite is right now around 21%, compared to the historical average of around 15. So, it’s little higher than normal, but nowhere near the P/E bubble territory above 44 in 2000. If earnings keep growing at their current rate, the stock prices will be justified. If not, you can count on a correction. But, there is no bubble waiting to pop.
The Bottom Line
The bottom line is that you need a plan and some discipline to invest in the stock market. If you can’t hold tight when your portfolio drops 20% you should probably leave your money safely in the bank.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
George Soros – Billionaire Investor
This post was featured on the Carnival of Personal Finance over at Nerd Wallet. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the best place on the web to get your financial advice.