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Do stock market milestones matter in the long run?

By From staff reports

By JOHN BURDETTE

For the Daily Mail

As I begin writing this, I'm watching the Dow Jones Industrial Average flirt with the 16,000-level for the very first time.

Every day in my financial advisory practice, I speak to people who mention milestones like this as justification to either avoid the market or jump in with both feet. The media also love to focus on these events and fill the airwaves with analysts arguing over which direction the markets will head next.

But should these events matter to the average investor?

The first thing to keep in mind is the number of the index is not indicative of its valuation. The index is simply an average of the share prices contained in the index.

Stocks have value because they represent ownership in companies and participation in the dividends and earnings they produce. As earnings and dividends move higher, stock prices tend to follow suit.

It is impossible to determine if an index is over- or under-valued unless you first look at the earnings of the included companies.

If you are looking at two companies that are identical in almost every way, except one earns twice as much income, which one would you be willing to pay a higher price to own?

Logically, you could pay twice as much for the high-earner and still have an equal valuation relative to earnings.

Investors always need to be aware that price is only one variable in determining value.

If you have been invested in the market for a long period of time, you have seen many record highs set and many milestones surpassed. I can assure you investors had the same hopes and fears 25 years ago when the Dow was at 2,000 that investors are experiencing now.

That emotional tug of war is what makes it a marketplace of buyers and sellers.

The key is to be a long-term participant in the growth of the market. A properly diversified portfolio has historically given investors the best opportunity to meet their long-term financial goals.

Don't be tempted to try and time the market and guess the next move higher or lower.

I can assure you, the market will have pullbacks in the future. Stay focused on the fundamentals of your investments and try to put the day-to-day "noise" of the market behind you.

When you retire 10, 20 or 30 years from now, this week's important news will seem insignificant.

I believe the real story these milestones tell is the creativity and productivity of the free market should not be underestimated.

Corporate earnings have grown tremendously over the years as companies have rushed to fill the demands of the consumer.

Many new products and services are introduced each year that have created revenue and profits that were hard to imagine just a few years earlier. For instance, I am writing for the first time from my iPad.

Where will the next driver of earnings and productivity come from?

We cannot clearly see the future, but I believe history points to continued developments and improvements in our standard of living.

We live in exciting times and we have a unique opportunity to participate and potentially profit as the future unfolds.

 

Disclaimer: Securities and advisory services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. Fourth Avenue Financial and NPC are separate and unrelated companies.

John Burdette is a financial adviser at Fourth Avenue Financial in South Charleston. Contact him through the Daily Mail at: business@dailymail.com.


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