On Tuesday, the Dow Jones Industrial Average, which tracks the performance of thirty blue chip companies such as Coca-Cola, Intel and Procter & Gamble, closed at 13,005. This was the first time it reached this milestone since May 19, 2008 at the beginning of the financial crisis.
The Dow first closed above 13,000 on the upswing on April 25, 2007 as the market was headed for its all-time high of 14,164 reached on October 9, 2007.
Dow 13,000 sounds good, but what does it mean for you?
“It’s more of a psychological milestone more than anything else,” says Ivory Johnson, Director of Financial Planning at Scarborough Capital Management.
The stock market is improving due to European Central Banks using monetary policy to prop up their economies and the U.S. economy is showing signs of improvement, Johnson emphasized.
Even though the market is trading higher and up considerably from the lows of March 2009, volatility is still an issue and Europe remains top of mind for investors. “European countries will have major refinancing needs over the next two or three months,” Johnson says.
If more brighter days are ahead for the markets, Johnson recommends looking at the technology and materials sectors. These are sectors that will benefit as companies invest in new technology or as more infrastructure improvements are done.
Jumping Into the Market
Financial housekeeping must be done before jumping into the markets.
Lynnette Khalifani-Cox, founder of the free financial advice blog, AskTheMoneyCoach.com says one of the biggest mistakes people make is to invest prematurely. “A lot of times people see a milestone such as Dow 13K and then think this is the perfect opportunity or a sign from God that they should be investing.” She says nothing could be farther from the truth.
Khalifani-Cox recommends individuals complete five major tasks before investing.
1)Pay down your debt. “It makes no sense paying 18% interest on credit cards. You should knock out debt first.”
2)Have a cash cushion. “The recent recession should have taught us to shore up our finances and have a Plan B,” Khalifani-Cox says. She recommends having a minimum of three months of expenses put aside for emergencies.
3)Draft a will. She says a will is a cornerstone of good financial planning and should be done first.
4)Protect your assets with insurance. Life insurance is valuable in building a portfolio. “Term life insurance is very affordable,” Khalifani-Cox emphasizes.
5)Get disability insurance. She says most Americans are woefully under insured with disability coverage.
Investing in Individual Stocks vs. Mutual Funds
After you complete these tasks, Khalifani-Cox recommends you ease your way into the market and prefers mutual funds over individual stocks. “It’s a very risky strategy to try and chase returns and pick one clear winner.”
She stresses the benefits of mutual funds. “Mutual funds offer instant diversification which minimizes risk and professional money management. It’s the low cost way to enter the stock market.”
Follow Shartia Brantley on Twitter at @shartiabrantley