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Three lessons for investors from the Dow’s record close

Trader Peter Tuchman smiles as he works floor New York Stock Exchange Tuesday March 5 2013. Five half years after

Trader Peter Tuchman smiles as he works on the floor of the New York Stock Exchange Tuesday, March 5, 2013. Five and a half years after the start of a frightening drop that erased $11 trillion from stock portfolios and made investors despair of ever getting their money back, the Dow Jones industrial average has regained all the losses suffered during the Great Recession and reached a new high. (AP Photo/Richard Drew)

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Updated: May 3, 2013 12:15PM

The economy is limping along. Unemployment is way too high. And Washington politics is totally dysfunctional. The media is full of warnings about the sequester and impending budget impasse.

And the stock market just made a new all-time high.

What does that tell you?

Well, just take a look back at summer of 2007, just before the market last reached these levels. The economy was booming, unemployment was low, home prices were soaring — and everyone had a good feeling about the future.

And the market plummeted — from over 14,000 to a low of 6,443 on March 9, 2009 — a decline of more than 50 percent.

Regular readers of my column remember my pleadings in 2009 to keep investing your regular monthly 40l(k) contribution in the stock market, because that fixed amount of dollars would buy more shares at lower prices. Today, you are rewarded.

And the Dow’s new record — 14,253.77 — doesn’t even reflect the dividends you would have earned over the past five years.

But those who acted out of emotion have seen the consequences in their retirement accounts — now being forced to work longer until they can afford to retire.

This is not an issue of blame. The market collapse of 2009 was the first true bear market many had seen in their investing lifetime. Not since the early 1970s bear market, a decline of 48 percent, had we seen such a frightening collapse in which even the “good” companies were dragged down to such low prices. This time, as in the 1973-74 bear market, it was hard to see the moment for the buying opportunity it was.

So what are the lessons to be learned now that the stock market is trading at new all-time highs?

Lessons learned

There are three major lessons to be learned, three Savage Truths:

1. The stock market always fools the greatest number of people. Just when everyone is most euphoric, you’re likely near a top. And when the mood is most pessimistic, you must be approaching the bottom. For all the “reasons” that the pundits give on a daily basis for the market’s up and down moves, all the commentaries about the immediate economic news, the market’s broad swings come from human emotion. That’s the tendency of the crowd to move to one extreme or another. And the crowd is always wrong.

2. Money moves markets. That may seem like the most obvious truth, but many people forget it. The Federal Reserve controls the money supply. And when it is aggressively creating new money, that money has to go somewhere. It may be intended to stimulate the economy, home building, car sales, and job creation. But, especially in times of uncertainty, the money moves into the markets — pushing prices higher. The Fed has expanded the money supply aggressively, continuing to buy $85 billion monthly worth of securities — paying for them with newly created money. There’s no surprise that the market has moved to new highs.

3. You don’t have to “beat” the market to grow wealth. Professional traders spend a lot of time figuring out when to get in and out of the market. But when you trade the market, you have to make three correct decisions: when to get in, when to get out, and then when to get back in again.

For ordinary investors — those just hoping to make money in their company retirement plan — the proven strategy is to just keep investing a regular amount at a regular time — and stick to the plan, through market ups and downs. Over the long run that has always been a winning strategy, and it has proved itself again.

Now you’re wondering if the market is “too high” to keep investing. But haven’t you been thinking that for the last two years? You’ll only know in hindsight. But the very fact that so many are still not convinced that they should be invested in the market is one of the best reasons to believe that the stock market will move even higher. And that’s The Savage Truth.

Terry Savage is a registered investment advisor for both stocks and futures. Post a question on her Sun-Times blog at Copyright Terry Savage Productions, Ltd. Distributed by Creators Syndicate.

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