The S&P 500 is again near all-time highs. Psychologically, it can be tough for some investors to stay invested or buy with stocks sitting near all-time highs. However, we believe that markets hitting new highs is not a signal to sell. Rather, it is a positive sign for the economy, for corporate earnings, and for investors.
Case for staying invested
The economy’s long-running expansion continues. History shows that investors who remain invested benefit from new highs. Based on historical returns, new highs more often lead to more highs, not imminent selloffs.
The opportunity cost of sitting on the sidelines can be extremely expensive. Market highs happen regularly over the long term, so a strategy of selling at a new high is more likely to disappoint than to predict a peak.
The S&P 500 and other market indices have no theoretical maximum value. For long-term investors, the expectation is that it will continue to move higher and continue to make new highs over time. Of course, there will be temporary corrections and periods of disappointing results (bear markets, recessions, normal fluctuations). A prudent investment plan implemented with a trusted advisor can help smooth out these bumps and avoid letting volatility derail long-term plans.
What’s significant about new highs?
There’s nothing particularly shocking about reaching new “all-time highs” when we’ve been seeing markets grind higher for decades. Since 1950, there have been over 1,255 days in which the S&P 500 closed with a record high, according to Bloomberg. Below is a graph that shows the S&P 500 from 1950 to 2019. This index has increased by over 17,000%. The key take away that markets have risen tremendously and new all-time highs are fairly common – which is the direct impact of moving in an upward direction.
Source: Yahoo Finance, 6/30/2019
Case for being cautious
For some, a market high can feel more like an indicator to get out. If you’ve built a healthy nest egg in recent years, new highs can be nerve wracking. This might tempt some investors to sell and wait for a better time to invest.
Stock can’t continue higher forever. One of these peaks will be the top, but predicting that ahead of time is not easy. Indeed, the market dropped close to 20% a couple of times (in 2011 & 2018) during this long bull market. These pullbacks turn out to be wonderful opportunities to buy, not a time to sell.
Unfortunately, no one can consistently predict future prices (or the timing of market movements). We believe the best strategy is to harness the upside potential of markets. Stick with a plan and stay invested, even as market’s reach all-time highs.
What am I supposed to do?
Rather than trying to predict the next move in prices, we prefer to prepare for an uncertain future by managing risk and continually seeking opportunities to upgrade investment portfolios. This doesn’t necessarily mean making dramatic changes, but instead following proven guidelines which have served our clients well over time. Here are some highlights of our approach in the current environment:
- Rebalance – With the rise in stocks, your asset allocation might be overweight equities. Periodically reducing stocks and adding to bonds can help ensure your portfolio is within your acceptable risk level.
- Be opportunistic – Not all stocks have gone up. There are pockets of opportunity. For example, value stocks, smaller-cap stocks, and foreign stocks have lagged relative to larger-cap growth stocks. As active managers, this represents potential opportunity to pick-up good companies trading at attractive prices.
- Secure Cash Flow – Have enough liquidity to make it through a tough year or three. Give yourself a margin of safety by having enough invested in safe holdings to see you through a disruption in the markets. This money can also be used as dry powder when the next downturn comes.
Your time horizon matters
If you’re relatively young, say under age 50, it’s tough to beat a prudent mix of stocks and bonds with regular rebalancing. Keep saving and shoveling money into a well-designed investment strategy. Don’t focus much on when the next downturn will occur.
If you’re in or near retirement, the focus could shift towards your goals and avoiding drawdowns. Review your financial plan. If you don’t have a plan, make it a priority. If the plan shows that you are on track, perhaps you can afford to reduce risk. Perhaps you don’t need to maximize returns from here. Maybe avoiding undue risk to the best way to ensure you don’t outlive your assets. Dialing back your risk might lessen the chance that your financial future will break down because of a bear market.
Conclusion
As markets continue to see new highs, it’s not uncommon for investors to worry. Yet this is an emotional reaction, that’s not based on research. One of the hardest things to wrap your head around as an investor is that all-time highs in stocks are typically followed by more all-time highs.
We design and implement investment strategies best suited to each client. Our approach is based on facts and evidence, not opinions and speculation. In simple terms, the evidence does not support selling because markets hit new highs.
