Dow Hits 13,000 Milestone

04/25/2007

The Dow Jones Industrial Average broke above the 13,000 mark early Wednesday morning for the first time. Although there has been excessive media hype about the milestone, it is indeed a significant marker in the history of the U.S. equity markets. The good news for bulls is that the Dow's new highs have come with confirmation from the broader S&P 500 index.

Take a look at the charts below of both the Dow and S&P 500 indexes. As you can see, both are trading at new highs and are well above their short-term, 50-day moving averages, as well as their longer-term, 200-day moving averages.

When charts look this way, you have to analyze them from a couple of different perspectives. First, if you've been holding equities for some time, then congratulations. You've weathered the stormy seas of the late-February and early March sell-off, and you now are back above the previous highs set early this year.

But just because you escaped damage by holding for the past few months doesn't mean that you will escape damage again when the market corrects, as it surely will. The best way to approach this market, if you are going long in the major indices, is to make sure you have a stop-loss on all of your invested positions. The absolute worst thing that you can do is to watch your gains evaporate because you were afraid to sell and to bank at least some of your profits.

The second perspective about assessing this market is to look through the eyes of those who have not yet put money to work and/or are tentative about buying equities at these vaulted levels. This is an understandable conundrum, since you don't want to buy at the top of the market, yet you don't want to miss out on any more stock price appreciation.

The solution here, as it so often is when it comes to investing, is patience. I do not think now is the right time for investors currently on the sidelines to enter into broad-based equities. The risk of getting caught in a sharp pullback, in my view, is just too high. So, what do you do with your money? Well, fortunately there are sectors of the market that aren't completely extended.

Consider the NASDAQ Composite. We can see in the chart below that although we are at the highs for the year, the index is not as overextended as either the Dow or S&P 500.

If you are thinking about putting money to work in a major average, you'd be much better off by selecting a market segment, such as the NASDAQ, which is not trading at all-time highs. Of course, as with any new equity position, you always should set a stop-loss each and every time you put your money at risk. Knowing how much you are willing to lose in any one position before you enter that position will help you to protect yourself from the ravages of a sharp market decline.

Always keep in mind that one of the biggest sins in investing is to take a big loss. Small losses are inevitable when you expose your money to the stock market, but there is absolutely no excuse for allowing yourself to sustain a big hit.

The other way to play this currently extended market, if you aren't currently in equities, is to look for opportunities with sound fundamental and technical factors operating in their favor. In my Successful Investing advisory service, we currently have a 25% allocation to a solid segment of the economy that is generating nice yields, as well as excellent price appreciation. This sector moves largely independently from the broader equity markets by capitalizing on some of the big-picture issues now affecting our economy.

For more on this segment of the market, and for more on how to properly manage your assets for maximum growth and maximum protection, click here.

A NEW CHAPTER IN COACHING

I have begun a new chapter in our coaching session series aimed at helping individual investors to understand their options and to make informed decisions about their annuities. Yesterday, I had an enjoyable conversation with a reader in Pennsylvania. His name is Jim. He owned an annuity that was sold to him by an advisor two years ago. He has been making money in this product, growing his cost basis from $130,000 to $160,000, but he really did not understand what he owned. The more he researched things, the less he liked his choice. After talking with me, we discovered several problems.

He had been advised to place his total 401(k) rollover into the annuity. There is absolutely NO BENEFIT to doing this except for the advisor, who is receiving a fat commission on the sale. Never place an IRA rollover in an annuity, since it just adds a layer of fees to your investment that creates a drag on its performance. In addition, use of an annuity as an investment vehicle for your IRA limits your flexibility and investment options. Finally, it restricts your access to the money. Jim is unable to withdraw from his account without surrender charges. He still has a deferred sales charge of 8% on his assets and is paying annual fees of 2.5%, instead of owning an ETF that has total fees of less than 0.5%.
Jim is currently invested in the stock fund options within the annuity. This strategy is fine, while the market is in an uptrend. But Jim must be ready to end his stock fund exposure when the market retreats. I advised him to start building a position in his bond fund option and to cut down on his aggressive fund choices.
Jim will be ready to start receiving an income stream from his IRA in the not-too-distant future. I advised him to check with his insurance company about his income options and to start with a life annuity payout. Then, he should check on the monthly income benefit from a period-specific payout. This requires him to check on the monthly payment that he would receive during the next 10 or 20 years. He found out that he was ineligible for these options until his annuity is more than three years old. This restriction was not explained to him by his advisor, who made several missteps in guiding Jim.

The bottom line is that Jim does have options. In August 2008, his annuity will be three years old and he can explore his payout option. He will protect his gains by having a sell discipline and he will be better able to manage his annuity now that he knows more about how that investment vehicle works.

If you want a FREE annuity coaching session with Doug Fabian, simply send an e-mail to askdoug@dougfabian.com.