Should Investors Play Catch-Up with the Key Stock Indices?
On May 7, the Dow Jones Industrial Average closed above the 15,000 level for the first time. This close marked an overall increase in the index of about 15% since the beginning of the year. Other key stock indices did the same, and at the very least, their performance was nothing shy of exuberant.
It may be good news for some, but this rise in the key stock indices leads to one question: if investors missed out on these gains, should they jump into the stock market and take a risk playing the catch-up game?
While this may be the very first option that comes to the mind of an investor who is planning to invest for the long term and hasn’t seen their portfolio perform similar to the key stock indices, they must ask themselves this before taking any action: is it really the most viable option? The answer to this question is very simple: no.
Instead of trying to play the catch-up game due to a significant rise in the key stock indices over a short period of time and taking higher risks, investors need to keep their long-term goals in mind. As I have been saying in these pages; long-term stable growth is far better than volatile gains in the short term.
If an investor believes the key stock indices will continue to rise, they should continue to focus on minimizing their risk. Instead of investing in small-cap, highly speculative companies, they need to look for defensive plays.
Why? As the key stock indices are rising, there is a possibility that there might a correction in prices; as a result, investors might be faced with a loss. A defensive stock might just give them a fighting chance to stay in the market and reap the rewards.
Consider the performance of PepsiCo, Inc. (NYSE/PEP), a well-known S&P 500 company that’s considered to be a defensive stock. In the beginning of 2013, PepsiCo traded a little below $70.00; it now hovers above $83.00, for an increase of a little more than 18%, as the key stock indices climb higher. This increase doesn’t include a dividend payment of more than $0.50 per share. (Source: Yahoo! Finance, last accessed May 8, 2013.)
Another option they might want to consider would be to look at an exchange-traded fund (ETF), which provides investors with exposure to the overall stock market, as opposed to a certain sector. To name just a couple, SPDR S&P 500 (NYSEArca/SPY) provides investors with exposure to the S&P 500, and PowerShares QQQ (NASDAQ/QQQ) lets investors reap rewards as the NASDAQ Composite Index increases
Taking higher risks to catch up with the key stock indices can be dangerous. Investors in the stock market for the long term need to make sure that their capital is preserved at all times. They need to follow the basic principles of investing—they should continue to focus on asset allocation, diversification, and trade management, no matter what the market conditions may be. Remember: things can turn as quickly as they are developed, and the losses can mount higher in the blink of an eye.