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Why You Shouldn’t Sweat Record Market Highs

By July 22, 2021March 10th, 2022No Comments

Should you keep your money in the stock market, or even add money when the major indexes are near all-time highs?

It’s a question many investors are asking right about now. From January to mid-July, the S&P 500 index posted 39 new records, and the tech-heavy Nasdaq recorded 54. That’s after 2019 and 2020 in which the S&P returned a combined 45% and the Nasdaq index returned a total 79%.

Given the market’s lofty heights, investors fear that there’s “no place to go but down” are to be expected. And this week’s market volatility hasn’t helped ease those jitters. But successful investing requires that we separate fear and other emotions from our decision-making process. And all the evidence we have indicates that waiting for the right moment to invest—rather than investing now—is the real risk.

To understand why, it’s important to bear in mind that investing for significant goals like retirement, education, or philanthropy is a long-term pursuit. Perhaps the single biggest way that investors trip themselves up is by trying to time the market—entering and exiting according to ever-shifting hunches about what might happen next.

The truth is that, while the markets are near historical highs—even after their recent volatility—there is no way to tell where they will go from here. And you should distrust anyone who claims to know. A case in point: Who would have thought that the S&P would end 2020, the year of a global pandemic, up 16%? And that it would rise another 14% in the first half of the following year?

There’s no historical evidence that investing at market highs hurts long-term results. In fact, the opposite appears to be true. When Dimensional Fund Advisors analyzed the S&P 500’s returns between January 1926 and December 2018, it found that, on average, the index returned 14.1% in the year after hitting a record high. In the three- and five-year periods after highs, the average return was approximately 10%, roughly in line with the index’s historical average.

It may seem prudent to keep money on the sidelines and to wait for cheap “entry points.” But doing so carries a significant opportunity cost. For example, if you spent the first six months of 2021 waiting for the right time to put $100,000 of cash into an S&P fund, you passed up around $14,000 in appreciation (not counting fees—which are minimal if you use a cheap index fund). And with today’s paltry interest rates, putting your money in short-term bonds or bank accounts isn’t much better than keeping it in cash.

Just as no investor can predict market tops, it’s equally impossible to predict bottoms. Investors waiting for the right time to jump in during falling markets have a notoriously hard time pulling the trigger. Often, they’re caught waiting as the market reverses course and zooms higher.

The bottom line is that market timing is a lousy way to invest. Patience is the antidote: The longer you stay in the market, the higher your odds of making money and the lower your odds of losing money.

BlackRock studied market results from 1926 through 2019, and found that in one-month periods, on average, U.S. stocks had negative returns 38% of the time and positive returns 62% of the time. Over the course of a year, negative returns occurred just 25% of the time, with gains taking place 75% of the time. Over five years, an investor would have lost money just 11% of the time and earned money 89% of the time. Over 15 years, the market made investors money 99.8% of the time.

No one can predict what the market can do from day to day; it’s out of our control. The good news is that we don’t have to try. To build long-term wealth, we merely need to control the things we can, including saving consistently, limiting the fees and taxes we pay on our investments, and exercising the discipline to stay invested.

Please don’t hesitate to contact us with any questions about investing.