The Dow: A Lesson From History


25 years ago today: Jason Zweig's excellent "This Day in Financial History" is featured on the cover of the Sept. 28, 1987 Fortune magazine, which asks, "ARE STOCKS TOO HIGH?" The story went on to answer in the negative, observing that "clearly something is going on that the old analytical concepts cannot account for."

Famous last words. Less than a month later, on Black Monday, Oct. 19, the Dow index (INDEX: ^DJI) fell 23% -- its largest single-day decline in history.

That begs the question: Are stocks too high today? I'm afraid my answer to that question is less sanguine than Fortune's was a quarter-century ago. I'm not suggesting that a crash is imminent, but the recent market rally is built on shaky foundations. On balance, I think the odds favor end-of-year values for the Dow and S&P 500 (INDEX: ^GSPC) below current levels.

Speaking of crashes, I have to give a hat-tip to Helen Bartholemew (@HelenBarthol) of the International Financing Review for bringing to my attention some interesting results of a State Street/EIU survey. Apparently, 71% of institutional investors expect a significant tail risk event in the next 12 months, yet only 20% are "very confident" that they have downside protection for the next significant event.

How should individual investors prepare for a potential correction? First, I urge you to read my colleague Morgan Housel's excellent free report, "3 Things Every Investor Should Know About the Stock Market." Second, one way to order to reduce the volatility of your returns is to invest at regular, frequent intervals. And, finally, "The 3 Dow Stocks Dividend Investors Need" are just a few of the best-suited stocks for this strategy. Click here to download this free report now.

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Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio; you can follow him @longrunreturns. The Motley Fool has a disclosure policy.
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