Fisher Investments Editorial Staff
US Economy

Meaningless Marker

By, 03/18/2010

Story Highlights:

  • The DJIA and S&P 500 are hitting highs not seen in months.
  • Some folks fear that once stocks reach new highs, they now must fall.
  • But assigning meaning to previous all-time highs may tempt investors to make too-early changes to their portfolio.
  • Making investment decisions based on arbitrary mental markers won't guarantee better portfolio performance going forward.

Headlines on Wednesday trumpeted a market milestone—the DJIA and S&P 500 indexes hit 18-month highs. (We'd caution you to mostly ignore the Dow, as it's a poorly constructed index.) Naturally, folks start wondering about what the next big milestone is. S&P 1200? S&P 1400? Dow 11000? Nasdaq 3,417? Dare we say, break-even? 

Our brains are naturally wired to make sense out of the otherwise meaningless. When stocks reach fresh highs, we might fear they are too high, and now must fall. And the higher something rises, the scarier the fall. But, forever, through history, stocks hit fresh highs, and keep rising. If it weren't true, there'd be no such thing as a bull market. There would just be a perpetual ceiling above which stocks couldn't rise, but you know that can't be true. (Capitalism and the sheer ingenuity of the human spirit say that something down the road will be innovated—something upon which investors will be willing to take risk for potential future earnings.) Not to mention markets don't care about their price level, or know when they are making fresh highs. They're just pricing in the market's expectations for future earnings—which is wholly detached from some notion that a certain price level is too high, too low, or "just right."

There's the other issue, too, of the high-water mark—break-even. Though we are still some ways away from the October 2007 high, many investors are already suffering the signs of "breakevenitis"—assigning import to their stocks reaching previous levels. But why? It's tempting to assign meaning to a previous all-time high as well, but it's as arbitrary as stocks reaching 18-month highs, 36-month highs, or the S&P achieving a price level of 1437. It doesn't mean anything, and doesn't tell you where stocks go next. Reaching some mental marker may give you some comfort, or perhaps more often instill some fear, but neither comfort nor fear are good guides in determining long-term goals or structuring a portfolio.

More likely, for investors who are too focused on arbitrary mental markers, they may be tempted to make some change to their strategy—whether warranted or not—based solely on the attaining of a height, a level, a number, a talisman, or some other comfy number or indicator. Resist the pull. Creating order out of chaos may settle your uneasy brain, but it won't guarantee better results going forward.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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