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Safe to buy stocks at new highs?

By Greg Guenthner · Bankrate.com
Monday, March 11, 2013
Posted: 1 pm ET

To the average investor, new highs posted last week by the Dow Jones industrial average were an impossible feat.

After all, how could the market move higher with all the trouble in the world?

Stateside, you're dealing with the culmination of two years of Federal government missteps. A debt ceiling debacle in 2011 was followed by the "fiscal cliff" to begin 2013. Now we're knee-deep in $1.2 trillion in budget cuts formally known as the "sequester."

But that's nothing compared to the potential nightmare that's shaping up overseas.

First, you have fresh concerns out of the eurozone. Fitch downgraded Italy's debt as the embattled country continues to slump after surprising anti-austerity election results. Fresh concerns over an inevitable recession throughout Europe have fewer and fewer investors believing in a comeback.

In China, expanded coverage of "ghost cities" and the ensuing real estate boom have many observers worried about a housing bubble and the effects on commodity and equity prices. Add in fresh war threats from North Korea, and you have a fragile -- if not volatile -- geopolitical landscape impacting your attempts to navigate the markets.

Yet through it all, American stocks have continued to post improbable returns. The Dow finished last week by notching record closing highs of 14,397. The current bull-market rally is four years old now -- and blue-chip stocks are finally powering through their 2007 ceiling. Standard & Poor's 500 index -- a much broader gauge of the U.S. stock market -- isn't far behind.

Understandably, many investors remain skeptical. They're convinced that these new highs set by the Dow are some sort of a mirage.

So is it safe to buy stocks at these new record levels?

Unfortunately, there's no cut-and-dried answer to this question. But to help guide you along your investing journey, here are a few facts to keep in mind.

  1. Stocks aren't moving higher at breakneck speeds. In fact, this year's gains are comparable to what we've seen from the broad market in recent years. Year-to-date, the S&P 500 is up 8.75 percent. In 2012, the S&P was up more than 9 percent by this point. All-time highs are making headlines -- but they don't dictate overall performance. Just because the market is breaking into new territory doesn't necessarily mean it's overheating or topping out.
  2. If you're looking to add to your holdings, you don't have to chase new highs. You can always wait for the market to correct a bit before looking to buy quality stocks. Since 2009, long-term investors have found success in buying on weakness. Until the market proves otherwise, this remains an effective strategy.
  3. Stay nimble. Don't become emotionally attached to your investing ideas. There's nothing wrong with testing the waters -- but allow yourself the chance to sell if your idea turns out to be a bust. The best investors in the world don't allow even one losing investment to drag down their entire portfolio. If your first attempt turns out to be a dud, cut it loose. There's no rule that says you can't sell if things don't go your way.

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Greg Guenthner, CMT, occasionally blogs about investing at Bankrate. The views expressed are entirely his own and do not reflect those of Bankrate.com.

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