The US Market - measured by the Down Jones - last night hit an all time record high. The question, then, is what does this mean for investors?
Please don't be dissappointed when I tell you that it means nothing.
I am constantly surprised by the number of people who assume that because the market is at a 'record high' that it must be expensive. Have a think about it, if markets provide average positive returns of around 12% a year, then the expectation is that they must keep hitting record highs over time.
That does not stop investors from selling out of a market when it hits a record high. The number of people I have come across who sold out of the Australian share market after it had risen about 50% from its 2003 lows is surprising. This happened in early 2005. However, did they take into account the growth in earnings by companies over that time? Did they consider how far the markets had fallen prior to 2003? And, now that share returns have been a further 40% or so (when dividends are included), how do they plan to get back into the market? Remember - not only have they missed 40% in investment returns, they would have had to pay capital gains tax as well. This tax would not have to be paid if they had not sold out of the market.
One great resource to use in seeing how markets increase over time is the Vanguard chart showing the returns of the different asset classes over time. You can order one from the Vanguard website here. It is titled the 2006 index chart.