The stock market is currently experiencing a holiday party of its own, with soaring numbers and impressive gains. It’s hard not to get caught up in the excitement, but financial advisors are urging investors to exercise caution before joining in. Amidst the exuberance, it is crucial to remember that things are never as good or bad as they may seem. A certified financial planner and CEO of oXYGen Financial in Atlanta, Ted Jenkin, warns against falling prey to irrational exuberance, emphasizing that investors need to approach the market rally with a level-headed mindset.
Over the past year, both the S&P 500 and the Dow Jones Industrial Average have seen significant increases. With the S&P 500 up by over 19% and the Dow Jones rising by 11%, investors have witnessed substantial growth in their portfolios. According to Morningstar Direct, a $1 million investment in the S&P 500 on December 12, 2022, would now be worth nearly $1.2 million. The recent surge in the market can be attributed to positive economic data and indications from the Federal Reserve that interest rates may be cut in 2024.
In light of the market rally, financial advisors emphasize the importance of maintaining a steady investment strategy. Investors should refrain from making impulsive decisions based on short-term market fluctuations. “Stick to your goals and your time frames,” advises Jenkin. Marguerita Cheng, CEO of Blue Ocean Global Wealth, urges investors not to pull out their investments in an attempt to capitalize on gains or access cash. In her experience, investors who succumb to these temptations often end up regretting their actions. The key lies in staying invested and understanding that time in the market holds greater significance than attempting to time the market.
Historical data demonstrates the perils of trying to time the market. Over the past two decades, the S&P 500 has yielded an average annual return of around 6%. However, missing out on the 20 best days in the market during that time period would drastically reduce returns to a mere 0.1%, according to Charles Schwab. CFP Sophia Bera Daigle, founder of Gen Y Planning, reminds investors that while the market may currently be at an all-time high, it could continue to climb even higher in the future. The market’s upward trends have been a consistent pattern throughout history, rewarding those who remain steadfast in their investments.
Regardless of whether the market is in the green or the red zone, experts advise against making significant changes to investment strategies. Instead, investors should review their risk tolerance and time horizon, analyzing any changes that may have occurred. Ivory Johnson, founder of Delancey Wealth Management, suggests maintaining a level of consistency, questioning whether any fundamental alterations need to be made. As the market experiences noticeable drops and surges, CFP Cathy Curtis, founder of Curtis Financial Planning, suggests using these periods as an opportunity to rebalance portfolios. For instance, if your desired allocation is 70% stocks and 30% bonds, you may need to sell some stocks and reinvest the funds in bonds to realign your portfolio.
In the face of an enticing market rally, it is crucial for investors to approach the situation with caution. While the allure of positive returns may be tempting, maintaining a steady investment strategy is paramount. By staying invested and refraining from impulsive decision-making, investors can navigate the market’s unpredictability with greater confidence. Remember, the market’s trajectory has consistently been characterized by growth over the long term. As the stock market continues to celebrate its holiday party, approach the festivities with prudence and a level-headed mindset.