The Dow recently rose above 15,000 for the first time. The S&P 500 has also risen into uncharted territory.
Since the lows of 2009, the market has more than doubled in value.
After pulling money out of stock mutual funds for the past five years, retail investors are starting to invest in equities again.
The market is going to fall. At some point, this market is going to take a breather and prices will take a precipitous drop. How can I predict this with such confidence? Because that is how markets work.
Since 1962, there have been 25 market declines of 10 percent or more. In nine of those cases, the market dropped 20 percent or more. That means we have averaged a temporary decline in the stock market about every 2 1/2 years, and the market takes a really gut-wrenching drop about every five years. But the drops are not nearly that consistent. They have come as frequently as every few months, and during the 1990's we went years without a correction.
When the drop inevitably occurs, the financial media will scream from the mountaintop that the world as we know it is ending. (Because that is what the financial media does.) We will hear about the apocalypse du jour. The media will feed us a steady diet of everything that is wrong in America and the world, conveniently ignoring everything that is right.
And millions of innocent skittish investors will panic, pulling their retirement funds out of stocks at exactly the wrong time.
Our hope, our mission, is to prevent you from being one of those investors. Here is how we plan to fulfill that mission.
First, we need to answer the most obvious question. If we know the market is going to take a precipitous drop, why don't we just get out now and wait for the market to fall and then buy back in at bargain prices?
Because we don't know when that drop is coming. It could be next month, next year, or several years into the future. It could drop when the Dow is at 15,000, 20,000 or higher.
Because short-term market movements are often driven by the emotions of millions of investors, it is impossible to know when the market will fall, how deep the drop will be or when it will recover.
Trying to predict the unpredictable is a fool's errand.
If you can't time the market, what can you do?
You can build an all-weather portfolio. A portfolio that includes bonds to provide you with the cash you need for both planned and unexpected cash needs, stocks to help you keep pace with inflation and alternative investments designed to help reduce your portfolio's losses in a down market.
But to be candid, for most people, that is not enough to keep them from panicking. Falling markets are scary. In the midst of a plunging market, we envision the loss of our money, and the loss of the life we have dreamed of living.
We may intellectually understand we will be okay, but emotionally we are scared out of our wits. And you can't logic your way out of an emotional response.
So, what can you do?
First, you can remind yourself that your wealth is about far more than your money. Over the short term, the non-financial elements of your wealth are far more stable than your investment portfolio. Those non-financial elements include your time, talents, body and mind, wisdom and your network of relationships.
The truth is most of us rely on these other elements of wealth, far more than our money, to create the life we desire.
Second, you can focus on what you have faith in, what you rely on, as you face an uncertain future. Because we always face an uncertain future. The trick is not to predict the future. The trick is to figure out how you can face that uncertainty with confidence. And we all do it differently.
Some of us rely on our relationships with our spouse, family and friends. Others have faith in Americans and our country's history of overcoming adversity. For some, their faith in God is what gives them peace. Maybe you rely on personal attributes such as your intelligence, your persistence or your resilience. Or maybe you comfort yourself with the wisdom that what really matters in life is not life's luxuries, but the quality of our most important relationships, our ability to engage in activities that grab our passions and making a positive difference in the world around us.
Whatever it is, sit down and write down what you have faith in as you face an uncertain future. Take an inventory of your other non-financial wealth and cultivate a sense of gratitude for your incredible abundance.
And do it now, before the market plunges and you feel the panic rise within you.
Because it's coming.