What Do Stock Market Records Mean?

Both the Dow Jones Industrial Average and the S&P 500 closed at all-time highs on Friday. It seems that every week brings new record-breaking highs for the Dow and the SP500. The question is, what do all of these record highs mean. Should an average investor do anything when the stock market hits a new record?

What Is a Stock Market Record High?

Let’s start with the basics. While individual stocks on the stock market are going up and down based on their own merit, and supply and demand, the stock market is often reported as a single thing. What financial reporters and analysts mean when they say “the stock market,” is one of the indexes of the markets. There are numerous indexes, but the most widely touted are the Dow Jones Industrial Average and the Standard and Poors 500 index. When people say the stock market broke a record high, they mean that one (or both) of those indexes is higher than it has ever been. (You can’t invest directly in the indexes, which are just academic, mathematical statistics, but you can get close using index funds.)

In a way, higher records are inevitable. Even if the intrinsic value of every investment somehow stayed constant, the forces of inflation would eventually cause stock prices to increase anyway.

What Should I Do With My Investments?

While stock market records make good headlines, they are really neither that uncommon, nor a reason to change your investing strategy.

However, they do provide a way to learn the most valuable lesson in investing. Panic, isn’t necessary.

stock market record recovery
What the stock market record means is that it is “up” even if you got in at the worst possible time right at the top.

If you recall the 2007 – 2008 implosion of the financial markets, the accompanying swoon in the stock market, and the Great Recession that followed, you may remember being worried about your investments. What a new record means to you, is that no matter how much money you “lost” during that downturn in the market, if you left it invested, you would have it all back.

That’s because the new stock market record means that the current index price is not only higher than when you lost all of your money (on paper at least) but also higher than it was BEFORE you lost any of your money.

In other words, a new stock market high means only one thing. The market, as of today, has recovered any loss it ever had. (And it will do it again next time as well….)

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