10/05/2006
Here's an age-old question that plagues all of us at one point in our lives: If you knew then what you know now, what would you have done differently?
I'd venture to say that a lot of you (myself included) would have done a lot of things in life differently. Well, right now we are facing one of these moments in our investing lives.
Yesterday the Dow Jones Industrial Average finished the trading session at an all-time high of 11,727.34. That new high eclipsed the previous record mark of 11,722.98 set on January 14, 2000.
Two months after that new high on January 14, 2000, the market virtually had crashed.
So, what was the mistake that most investors made leading up to the January 2000 high? Well, most rushed headlong into the bull market, erroneously believing that the good times would continue indefinitely. Of course, we all know what happened in the succeeding months and years following the Dow's last record high -- the party came to an abrupt end, and a lot of wealth just evaporated into the ether.
Is this, as Yogi would say, déjà vu all over again for the Dow? I wish I could tell you I knew, but the fact is nobody knows for certain. What I do know for certain is that to protect yourself from another record-high-to-bear-market move in the Dow, you must have an insurance policy in place.
Please don't permit yourself to get swept up into the current market euphoria without a conscious recollection of what has happened in the past. It is imperative that you take steps to prevent yourself from getting washed away in the flood of the next down market. And folks, believe me, there will be a next down market. History tends to repeat itself, and as Santayana famously said, "Those who do not remember the past are condemned to repeat it."
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In honor of the market's vaunted new-highs, I thought it would be helpful to add a little dose of reality to the over-hyped CNBC newscasters, who act as though the Dow's breakthrough is their birthday, Fourth of July and Christmas all rolled into one. Here are a few facts and a bit of comparative analysis about current and past circumstances.
So you see, all is not well in "Dowville," nor is it all well in the market at large. Yes, oil prices are falling, interest rates are in check, corporate profits are solid and money appears to be migrating from housing and other asset classes into stocks.
Sounds like 2000 to me.
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Recently an Alert reader and avid radio show listener wrote me to let me know about a new tool designed to help ETF investors. I want to thank that listener -- you know who you are -- as what I discovered was indeed a great new device designed to help investors evaluate ETFs.
This great new ETF tool is called the ETF Screener and it can be found on the American Stock Exchange website. The tool allows you to compare ETFs by issuer, style, expense ratio, net assets, trade price and total return.
You'll also find a description of each ETF, its performance, top holdings and distribution information. Once you have screened the funds that you are interested in, you get the best information by clicking on "tear sheet" to give you a top-to-bottom rundown on the fund.
I personally have tried this new tool and I absolutely love it. If you are employing ETFs in your investment bag, I strongly suggest you check out the latest from the Amex website.
"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions...?"
-Alan Greenspan, December 5, 1996
It's good to keep in mind that when it comes to the markets, history is a powerful reminder that things can go south in a hurry. If you don't believe me, just ask Alan Greenspan.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions that you have about my radio show, newsletters, seminars, or anything else.