Use caution as the market gets higher [Financial Perspectives]

The stock market has been running on adrenaline over the past several weeks.  With the Dow hovering near 14,000, it is hard to gauge what the future holds.

The market has been escalating, while the economy has been sending mixed signals.  The housing market has been improving for the past several months – in both the new and existing home markets.

Unemployment returned to 7.9 percent, which was up from 7.8 percent at the time of the election. A significant number of workers have fallen off the unemployment roles are and the prospects for them is not good; employers only want to hire those who are currently working or have recently become unemployed.  For many craftsmen in Philadelphia, it has been challenging to get consistent work.  Many were out of work for some part of 2012.

The reason this is such a concern to a significant number of economists is that the low interest rate environment provided by the Federal Reserve Bank has fueled the stock market for some time.

A second concern is the recent spike in cash inflows into the stock market by regular investors.  We have not seen a surge like this since late 2007 before the market crash.  Huge cash inflows into stock mutual funds usually occur at the end of a market cycle (before a correction).

Unfortunately, a large number of small investors wind up buying high and then selling low when the market corrects.  The greed driven by a rising market gives people a false sense of security and they take on more risk than they should.

It is hard to say what could trigger a market correction.  Negative news from Europe, a fiscal crisis here (the March 1 deadline is coming soon), or the looming crisis for state and local governments.  Whatever the cause, it is hard to recover from a big correction quickly.

If you are one of those investors who have taken on additional risk hoping to benefit from a pop in the stock market, you may want to re-think this strategy soon.  This is especially important if you are getting close to retirement.  Folks in this category can ill-afford to experience a significant dip in their portfolios just before they retire.  Many older folks had to postpone retirement when the market tanked in 2008 and some are still working.

If you are in your 20s or 30s, you really do not have to worry about this.  However, if you are in your 40s, it may be wise to evaluate where you are with your retirement plan.  If your asset allocation is heavily weighted towards stocks, it may be wise to gauge your risk level by completing a risk tolerance questionnaire or meeting with an advisor and then make changes to your portfolio accordingly.

As Sgt. Phil Esterhaus on the ’80s hit TV show Hill Street Blues used to say,  “Hey, let’s be careful out there.”

Good luck with your planning!

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 jim@familywealthservices.net 215-332-4968

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.