Over 2000

The S&P 500 Index Closes Above 2,000 and So What?

Over 2000

On August 26th, 2014, the S&P 500 Index closed above 2,000 for the first time by the skin of its teeth (2,000.02). To us at Index Fund Advisors, it is just a number and nothing to get excited about. We are reminded of what one of our favorite authors (Charles Ellis) said in Winning the Loser’s Game, “The average long-term experience in investing is never surprising, but the short-term experience is always surprising.”

We should not be surprised that an investment in capitalism has produced a return for its shareholders. Indeed, as shown in IFA’s Capitalism, Inc. stock certificate below, global publicly traded companies (of which the S&P 500 makes up a substantial part) have about $26.6 trillion in sales and earn about $2.4 trillion of profits every year.

We have no doubt that some pundits will use this new milestone as an occasion for claiming that the market is “overvalued” and that we should all liquidate our portfolios and head for the hills. For us, as we have always said, every day has the same expected return, and there is zero reason to ever believe that it is negative. Indeed, to say it is negative is to say that the market has failed in its most basic function of setting prices so that investors can expect appropriate compensation for the risk they bear.

The opposite error we may see is that investors may become complacent about risk by adopting the attitude that the market only goes up and will move all of their assets into equities. Such investors would do well to remember the bear market that began in 2000, after the S&P 500 had nine straight years of positive returns (six of which were double-digits).

IFA’s advice is to avoid both of these extremes and to keep your portfolio at the risk level that you originally agreed to. With stocks having gone up, this may mean paring back on stocks and buying bonds as part of rebalancing. If you would like to learn more about IFA’s approach to fiduciary wealth management, please give us a call at 888-643-3133.