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Perspective On Stock Market Trends

Just past the middle of 2013, the Dow Jones Industrial Average (DJIA) hit an all-time high of 15,549 points.  As noted by Robert Klein, president of the Retirement Income Center, in an article posted on MarketWatch.com, that represented an increase of 9,002 points, or 137.5%, since the DJIA closed at 6,547 on March 9, 2009, after a 17-month decline.  The upswing equates to an average annual increase of 31.25% over nearly four-and-a-half years (Source:http://www.marketwatch.com/story/stock-market-gains-arent-what-they-seem-2013-07-22).
 
But Klein sounded a warning to those jumping on the stock market bandwagon. Before the DJIA began its historic descent, it had closed at a high of 14,165 on October 9, 2007.  So the recent 15,549 closing price was only 1,384 points, or 9.8%, above that mark.  In the nearly six years it took to reach the mid-2013 milestone, the average annual return was 1.7%. 

In other words, your viewpoint on recent stock market trends depends, to a great extent, on your point of reference.  If you go back to October 9, 2007, an average annual return of 1.7% seems to leave plenty of room for additional growth in the market, especially if economic indicators are generally positive.  On the other hand, suppose you’re using March 9, 2009, as your focal point.  With an average annual return of 31.25% in the rearview mirror, it may seem conditions are ripe for a significant pullback—and you may wonder just how severe the next downturn will be.

 That leaves some investors in a quandary.  If you’re planning to retire, say, within the next five years, and you’re counting on having your stock holdings gain an average increase of 4% a year over the long haul, Klein notes that a major hit to your portfolio just before you retire could be a huge problem.  It might force you to delay retirement by several years, as happened to many people who were set to retire in 2009, or result in a downgrade in your retirement lifestyle, or both.

Still, even if you’re in that situation, Klein doesn’t recommend pulling completely out of the stock market.  If you’re approaching retirement now, assuming you’re in decent health, there’s a good chance you’ll live 15 to 25-plus years after you retire. Given current rising interest rates and the potential for increased inflation in the future, keeping a healthy dose of diversified equity holdings in your portfolio appears prudent.  

No one has a crystal ball to predict what will happen in the stock market later this year and beyond. For the majority of investors nearing retirement, Klein advocates a balanced conservative approach. Whether you use the March 9, 2009, DJIA closing price of 6,547 or the October 9, 2007, closing price of 14,165 as your point of reference, this may the best path to follow.

   




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