We should not necessarily assume that just because the trend has been to buy into the stock market that it would be the right move, in general. For many investors, just the opposite could be true. The best time to buy is generally when prices are low and heading up, but we have been at near record highs on the Dow for months now. Is it really the right time to jump into the market?
Let’s take a step back for just a moment. 2012 was a year full of worries, from the European sovereign debt issues to the fiscal cliff. With all of this staring them in the face, many investors chose to sit on the sidelines and hold onto their cash. Thankfully, the year is behind us and we were able to avoid significant calamity. The major indexes, like the Dow, S&P 500 and EAFE all ended the year with respectable returns. It clearly does not hurt investor confidence to see the S&P 500 close above 1500 on January 25, 2012, which we haven’t seen over five years.
But before you “dive into the stock market” be sure to take the time review your asset allocation. Ask yourself if you have a clear vision of what your asset allocation goal is for your portfolio versus where you are today. Your asset allocation is derived by determining your time horizon, liquidity needs, tax impact, risk tolerance and economic conditions, both domestically and globally. The equity exposure in your portfolio, or as I call it, the “offensive side” of your portfolio, should have a long-term time horizon. In my practice, that’s seven years or more. This is not money you will use for emergency reserves, paying for your child’s college expenses this year or a down payment on a home next year. These are longer duration funds. The stock market and Washington lawmakers will continue to be unpredictable. This is why staying focused on the long term with equity dollars is usually a better choice.