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Market milestones like Dow 22,000 are a good time for Main Street investors to reassess their portfolios and to remember what history says about these big round numbers.
1. New highs happen. The Dow didn’t get to 22,000 without passing 1,000, 10,000 and 20,000 along the way. The point: Stocks tend to rise over time and can often make a string of new highs before stocks make a final top.
2. Think long term. Sure, the Dow can tumble after a big run, causing a temporary drop in your account balance. But a rally supported by strong earnings and a growing economy, like the current market is, will build wealth over long periods of time.
3. Keep expectations in check. The Dow has been on a tear and has more than tripled in value in the past eight years. So with prices no longer cheap, future gains might be less robust.
4. Watch for signs of top. Bull markets don’t die of old age. They typically end when a recession hits, investors get irrationally exuberant and market leaders, such as tech stocks, tank.
5. Monitor valuations. When stock prices relative to corporate earnings get super frothy, like they did in in 2000 when the Nasdaq composite was trading at 107 times its earnings, it could be a signal that the bull is overheated and could cool off. (On average, the broad market gauges tend to trade around 15 or 16 times earnings.) Currently, the Dow has a P-E of around 20, according to S&P Dow Jones Indices.
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