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U.S. stock markets have been rallying since October. Time to get worried?
The Dow Jones Industrial Average has been bumping along at or just below 13,000 for a few trading days now. As the Wall Street Journal points out, the Dow is up 22 percent since October, an impressive rally given that the economic news, while improving, isn't that good.
So what does it all mean? Well, you could argue for extreme caution at this point. Because the risk-craving money has probably already come into the markets, earning its double-digit returns, it's going to start looking for a way out. Enter the "dumb money," otherwise known as the retail investor. Some analysts think the dumb money has already showed up and is keeping the market elevated.
Regardless, the tail end of a rally can be hard on unseasoned investors. They may panic if they bought high and suddenly see their holdings turn lower as the pros rush back to cash, preparing for the next sustained rally.
The solution for the retail everyman investor is something called "dollar cost averaging." Rather than trying to decide whether to buy or sell, you simply buy. It's a long-term investment strategy that enables you to ride out the rallies without selling stocks that may dip, but that will eventually return to an upward trend. And when those stocks do dip, you buy them at a lower price. You buy Apple at $500 and and $450. Or Microsoft at $35 and $25. The trick is deciding what fixed amount you want to invest each month and stand by it.
It's a decent strategy for times like these, when you might be tempted to flee the market, as the dumb money rushes in. Dollar cost averaging means that your money may never be brilliant, but it will at least be relatively smart.