The S&P 500 index closed at 676.53 on March 9, 2009. Five and a half years later, the S&P 500 is right around 2,000. It has now become the fourth longest bull market, dating back to 1928. With dividends reinvested, the index has gained nearly 220 percent over that time period. United States small-cap stocks and mid-cap stocks have appreciated even more.
Individuals who missed the run, or those that stayed invested, are all asking: What do I do now? Do I stay invested? Do I become more conservative? Should I put my cash to work at these market levels?
These are great questions and, of course, the answers depend on your risk tolerance level and time horizon. If you have at least a five-year time horizon and the ability to ignore short-term fluctuations, then consider the following. The forward P/E ratio for the S&P 500 is around 15.1. The historical average is closer to 16. This means that even though domestic stocks have had a great run over the last 5.5 years, valuations are not necessarily overly extended. Stocks are fairly valued, and still look attractive relative to other asset classes. Remember that inflation historically runs 2-3 percent per year. So the CD paying 1 percent is actually a guaranteed loss of 1-2 percent per year from a purchasing power perspective. The 10-Year Treasury yield is at 2.5 percent. This again is not very attractive, as it will probably barely keep pace with inflation.
For individuals who are all cash, I would recommend a dollar-cost-average strategy. This will remove the difficulty of trying to time your entry. Also, keep your domestic equity exposure slanted toward large companies and value companies. When a correction occurs, small-caps, mid-caps and growth companies typically get hit the hardest.
The most prudent approach is to use a diversified portfolio with exposure to domestic stocks, international stocks, real estate, commodities, international stocks and fixed income. Work with your financial planner to choose the appropriate allocation and diversification.
about the author
Brady McArdle, CFP, Owner/Principal, Galecki Financial Management Fee-Only