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Summary

  • The Dow and S&P 500 hit record highs again last week on a positive jobs report.
  • Is hitting new market highs a cause for investor celebration or caution?
  • I continue to remain a bull at the moment and have been for the last 5 years.
  • Another bear market is lurking out there somewhere, but given the investment tools that I now have available to me, I feel much better armed to weather the bear market.

When I got into the business in 1993, the Dow was trading at 3,750. Last Thursday, the Dow Jones Industrial Average hit an all-time record high, closing above 17,000. That works out to an average annual return of a little less than 8% per year. So if you had invested $10,000 in the Dow back then, it would be worth $45,000 today, $100,000 would be worth, $450,000, and $1 million would have grown to $4.5 million.

But along the way, investors would have had to endure some really big drops in their nest eggs. During the 2001-2002 bear market spurred by the bursting of the tech bubble, the tech-heavy Nasdaq Composite declined almost 80%. Thirteen years later, the Nasdaq has still not recovered all that value. The S&P 500 Index fared better, down "only" a 37% peak to trough during that same bear market period. But the magnitude of those declines was difficult to stomach.

Investors finally regained their appetite for stocks back by 2007. The S&P 500 Index made headlines by crossing the 1500 mark, finally peaking at 1576. Just six months later, the stock market would retreat to 666.76, the victim of the Global Financial Crisis and the Great Recession that followed. Compounding the effect of the bear market of 2008-2009 was the fact that most investors not only saw their portfolios get cut in half, but they also lost most, if not all, the equity in their homes.

The S&P 500 did not get back to 1500 until January of 2013, taking six years to recover. Now here we are back hitting new all-time highs for the S&P 500 and the Dow Jones Industrial Average. This is both a cause for celebration and a reason to worry. At some point in time, the markets will top out yet again and another bear market will hit. If only there was a way to see a bear coming and hibernate in a cave until it passes.

I make no guarantees, claims, or promises going forward, but this was one of the main reasons that caused me to develop my Best Stocks Now app. It was during the 2007-2008 bear market that I started working on the app in hopes of devising a better way to invest and defend against bear market periods.

One thing that I experienced during that time was that asset classes behave quite differently during bear market periods. The bond market (NYSEARCA:TLT) was up 32% in 2008, while the stock market traded down 38%. Based on this observation, tracking asset classes became an integral part of my app. Asset classes are ranked daily. I realized that getting the asset allocation part of the equation right is extremely important. Here is my current ranking of top 8 asset classes of the 60 that I track.

Data from Best Stocks Now App

As you can see, equities still dominate the leader board. They have dominated the top spots for the last five years.

Here are the current bottom ranked asset classes:

Data from Best Stocks Now App

Being short the market has been the worst place to be for the last five years, and it still is. What about asset allocation?

Conventional investment wisdom suggests that you allocate to different asset classes based on your risk tolerance and age bracket. But as I track my Best Mutual Funds database (soon to be an app), the Asset Allocation Mutual Funds are perennially at the bottom of the heap. That tells me all I need to know about asset allocation strategies.

I believe in allocating only to the best asset classes that are flourishing and staying out of the ones that are not. In 2008, bonds and gold were the best asset classes to be in, and equities, in general, were the asset class to avoid. However, I also discovered during this time that certain stocks actually behave quite well in a bear market. Stocks like deep discount retailers, pawn shops, and auto part stores delivered positive returns. So even in a bear market, there are pockets of opportunity in the stock market for investors.

Today, there is also the asset class of inverse or bear market funds available to investors. These products started to proliferate in the 2008-2009 bear market and are now widely available in most asset classes.

So as I look at the Dow and S&P 500 Index hitting new highs, it is a cause for celebration and a reason for caution. I am still bullish on the market. I have been a bull for the last five years. Another bear market is lurking out there somewhere, but given the investment tools that I now have available to me, I feel much better armed to weather the bear market storm when it finally arrives.

Source: Is Dow 17,000 The Top?