In 2014 the media was filled with news about the Dow Jones Industrial Average setting record after record high. It closed on December 26th over 18,000 for the first time ever. However, on Jan 6, 2015 the Dow closed at 17,371 – a 667 point drop (-3.7 %) in 5 trading days.
As we publish this commentary on 10-15-2014, the DJIA stands at 16,141. On September 19th it stood at 17,279. So in the last month the Dow dropped 6.6%. Most of you are aware that we have been expecting this for some time.
In June, the Dow Jones Industrial Average briefly closed at an all-time high of 17,068. Obviously there is a lot of investment optimism for the U.S. stock market. Most economists agree that there is reason for long term optimism. However it would not be surprising to see a temporary correction before the market goes higher.
Which is better, to catch the market highs, or to cushion the market lows? In order to answer the question above, it is important to take a historical look at different types of portfolios over volatile periods of time. For most of us, the period from 1999 through 2013 was the most volatile timeframe for financial markets we have seen in our lifetimes.
The first thing we learn as Financial Planners is that no one can predict the future when it comes to the stock market. The best we can do is build diversified asset allocation portfolios, which allow us to participate in the markets while giving us some margin of protection on the downside.