So, the Dow Jones Industrial Average has surpassed 14,000. Pretty exciting, right?
Well, yes and no.
Yes, because the number reflects a stock market that's been rising for a while now and making many people wealthier along the way.
But the Dow isn't the most meaningful measure of the market, if you ask me -- and many others. For one thing, it's based on just 30 companies, albeit big ones. Considering that there are more than 7,000 public companies out there, that's less than 0.43% representation.
As a market measure, I'd rather look at the S&P 500 index, which includes 500 of America's biggest companies. Together, they make up more than 75% of the entire U.S. stock market's value. Some representative components include Eastman Kodak
Here's a more meaningful milestone: On May 30, 2007, just two months ago, the S&P 500 closed at 1,530.23. What's so special about that? Well, it marked new territory for the index -- it was a new record closing price. You see, it was just about seven whole years ago that the index last set a new high. Since then, we enjoyed a bubble bursting and years of slumping, stagnation, and, finally, steady growth again.
What it means
So what does this milestone mean? In some sense, very little. It doesn't tell us whether the market will keep rising in the near future, for example. It doesn't tell us how long the next period without a new record will be.
Still, there's a huge lesson: When stock markets slump, the slumps can last for years, not just months. If you'd excitedly bought into an S&P 500 index fund seven years ago, which is generally an excellent thing for most of us to do, you'd have ended up waiting seven years to see a profit -- at least if you don't count dividends.
This is why it's best to invest only long-term money in the stock market. If you'd parked money in the S&P 500 seven years ago that you planned to spend on a down payment for a new car in 18 months, you'd be driving a Flintstone-mobile now -- accelerating and braking with your feet.
Of course, it's hard to say how long a period "long-term" means. I often suggest that you plan to remain invested at least five years, and that 10 or more years is even better. Clearly, five years wouldn't have been enough in this instance, though with many slumps, it would be.
Remember also that though these slumps can be depressing and protracted, they shouldn't lead you to avoid the market entirely. Despite the temporary downturns, the market has, in the past, kept rising -- enough to deliver average annual gains of around 10% over decades.
What to do
So what should you do, if you're afraid of a major market meltdown happening soon after you buy in? Well, no one can predict consistently and correctly when these things will happen. So just staying out of the market forever isn't the best option. Instead, given a long time horizon, you might just jump in, prepared to wait it out if you need to.
Another strategy is to divide your initial investment into halves or thirds. Buy the first chunk now, and then wait a while -- perhaps six months or a year. Then buy the next chunk, and so on. That way, if the market dives after your first purchase, you'll get in at lower prices with your next buy. Of course, if it keeps rising, your next buy will cost more.
As long as you have money coming in, probably from the savings you generate from your income, you might want to just not sweat about it. Keep investing regularly, when you can, and expect things to turn out well in the long run.
Another option is to invest in things other than the overall market -- such as individual stocks or managed mutual funds. They can slump just as well as, or even more than, the overall market, but if you've spread your assets into both a broad index fund and some other investments, they won't all behave the same.
Many excellent funds have outperformed the index over long periods. The Delafield (DEFIX) fund, for example, gained 14% and 32% in 2000 and 2001 -- two losing years for the overall market -- and lost only 7.5% in 2002, a year when the S&P 500 fell more than 20%.
There are other compelling funds out there, with proven managers and appealing track records. You can find them on your own, by reading broadly or screening for them. I also invite you to sign up for a free trial of our Motley Fool Champion Funds newsletter, which offers some terrific fund recommendations monthly in an easy-to-digest format. (I've found a bunch of winners there.) Its picks are beating the market by some 15 percentage points, and the last time I checked, none of them was underwater. In fact, over just a few years, fully 25 of them were up more than 40%. A free trial will give you full access to all past issues, so you can read about each recommendation in detail.
Best wishes, patient investor!
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. She was interested to learn recently that people wearing comfortable shoes tend to burn more calories, because they walk more. Electronic Arts is a Stock Advisor recommendation. Newell Rubbermaid is an Income Investor recommendation. Waste Management is an Inside Value pick. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.
