“Make hay when the sun shines.” That’s what the farmers say.
On Thursday, January 4, 2018 the Dow Jones Industrial Average (Dow) topped 25,000 for the first time.
That’s a lot of sunshine! And it’s obviously great news for investors and anyone who has been “long” in the market these past several years.
How high will markets go? What’s the best way to make hay before the sun sets on this amazing run in the stock market?
Below are 5 ways to make the most of the DOW at 25,000.
Update your financial plan. There was a time when many investors were afraid to open their statements. Maybe you were one of them. These days, however, it’s likely that your 401k, IRA and other account statements are showing some nice gains.
Take this opportunity to update your financial plan to see if you are on track to reach your goals. Who knows? Maybe retirement is closer than you thought.
Go ahead and take a peak. It won’t hurt, and I think you might like what you see.
Pay down debt. Years ago, during the dotcom bubble, I had invested in a trendy telecom stock that experienced significant gains. I was also leasing a car a the time, freeing up my hard-earned capital to be put to better use elsewhere. When the lease was up I had the opportunity to buy the car for about $12,000. Coincidentally, that was about the value of my trendy telecom stock.
I didn’t want to sell my stock. It was doing so great! (Back then I was a genius, you know.) And besides, there was the tax bill. Being the genius I was, I decided to keep the stock and lease another car.
Fast forward 3 years and 36,000 miles. My stock was worthless, and my car lease was about to expire – again. In hindsight, I should have sold the stock, paid the tax and pocketed my $300 a month lease payment. At least then I would have a car to drive.
Learn from my mistake. If you owe money on cars, credit cards, student loans or other forms of debt, consider taking some money out of the market while it is at an all-time high to pay off those debts. You can then redirect your monthly payment back in to your IRA, 401k or other long-term savings plan.
Review and rebalance your portfolio. Do you know how much your IRA or 401k balance could fluctuate in various market conditions? If markets decline like they did in 2008, would that affect your ability to retire, or send your kids to college, or even to pay the bills every month?
Markets are up, and I believe over time will continue to rise. However, markets don’t go straight up for ever. Market corrections, of 10% or more and bull market sell-offs of 20% or more, are in your future. Who knows? Maybe sooner than you think.
The time to reduce market risk and rebalance your portfolio is when markets are up, not after they have dropped 10%, 20% or more. Take steps now to ensure that your investment portfolio is in line with your goals, time horizon, and risk tolerance.
Find ways to save more. A booming market doesn’t do much good if you are not in it. The more you can participate, the more you can benefit.
Even if you are not wild about adding more to a market that many feel is overdue for a pull back, it’s always best to save more money. If you are not maxing out your retirement plans, do so now. Or at least, try to increase your contributions.
Adding to your IRA or 401k will help you get closer to your goals. If you want to juice up your savings, consider adding to a Roth IRA or the Roth feature in your 401k.
Take another look at your college savings. If you have saved money for college in tax-deferred college savings plans, consider making changes to lock in some of those gains.
College savings plans are used by millions of parents to set aside funds to help pay for college. They offer tax-free growth on your investment, if the proceeds are used for qualified college expenses. However, they come with some drawbacks.
One drawback is that you can only make a change to your asset allocation strategy twice per year. If you expect to need money for college tuition or other expenses this spring, this fall or even at some point during the next few years, consider reducing your exposure to stock market risk now. Most funds offer lower risk options that can help preserve principal in a market downturn.
Recommit to long-term, buy and hold investing. Here’s a bonus tip: use today’s market highs to remind yourself that long-term buy and hold investing works.
Timing the market is next to impossible, and most people get it wrong. But investing for the long-term almost always pays off.
Peter Lynch, author of the book, “One Up On Wall Street” and considered to be one of the greatest fund managers of all time, once said “Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves”.
That doesn’t mean that 100% of your money should be invested in the stock market at all times. However, a well-diversified portfolio that is invested with a 5- to 10-year time horizon or longer will likely outperform money under the mattress over the same time period.
Pay down your debt, allocate your investments according to your time horizon and risk tolerance, find ways to save more money, and focus on the long term. That’s how you will make hay in 2018.