We know you’ve heard of the saying, “buy low, sell high.” And so far this year, the stock market is having a great run. In recent weeks alone, the S&P 500, Dow Jones, and Nasdaq have all touched all-time highs for the first time in two years. So now that stocks are decidedly not low, does it mean it’s not a good time to buy? Should you wait until stocks fall to maximise your returns?
Here at MoneyRise, we thought we’d unpack some data behind all-time highs to help you make sense of this moment.
To start, we’ll analyse why all-time highs make some investors nervous.
It is a common principle that to make money in the stock markets, you have to sell a stock for more than you paid for it. And if prices start out high, it might be harder to do. For this
reason, investors try to avoid buying overvalued stocks, which basically means paying too much for what you get (a company’s earnings). And sometimes, entire stock indexes get overvalued, leading to a painful correction or fall, when investors across the board realise that companies aren’t making enough money to justify their high stock prices.
Does that mean I shouldn’t invest in stocks now?
While it sounds like a good assumption, the data doesn’t agree. North American stocks have marched steadily upward over the past century, and some bull markets have run for decades, partly because rising stocks and a booming economy can self-reinforce each other. So, if you’re waiting for a crash before you get in, you could wait for a long time and miss out on big returns. For instance, if you thought stocks were overheated in 1980 and delayed investing until the next bear market (a 20% downturn), you would have waited seven years and missed out on something like 117% in returns. And even that downturn was a four-month blip in a historic 20-year bull market during which the S&P 500 rose north of 1,000%.
So, all-time highs don’t mean a correction is imminent?
History suggests no, at least not usually. Looking back to 1957, when the S&P 500 was created, the index has notched a new all-time high about every 14 trading days, or 7% of the time. Moreover, the S&P has been within 5% of its latest high about 60% of the time and has been in a bear market only 12% of the time.
But what if there is a correction? Does that mean my stock portfolio will be ruined forever?
Not if you’re diversified and investing long-term. The New York Times recently pointed out that if you invested in an S&P index fund on October 9, 2007, right before the stock market fell by more than 50% during the global financial crisis, you still would have gained 9.3% annually in the years since then for a cumulative return of 325%, provided you reinvested your dividends. While recognising the unpredictability of the financial markets, it is essential to acknowledge the possibility of downturns, recessions, or even a depression.
Our advice to investors has always been: expect rough patches in the market, don’t be surprised by them, and stick to your plan. But we also know it’s hard not to panic when the market moves erratically.
However, a crucial aspect to consider is the historical trend that, over time, the stock market tends to grow in line with the economy’s growth and wages. While this is not a guarantee for the future, historical patterns suggest that, on a longer-term horizon, the market has displayed a propensity to recover and thrive. So as long as you have a diversified portfolio—you own stock across different sectors and different geography— and believe in the long-term prosperity of the economy, then you stand to do quite well.
What are we saying essentially?
There’s risk everywhere all the time. No one knows when the next downturn, recession or depression might occur. However, history has shown that, for most investors, time in the market is more important than timing the market. As such, investment accounts are for longer-term investments, and the key to navigating the uncertainties of the stock market includes maintaining a level-headed, long-term perspective.
At Risevest, we encourage investors to be committed to investing for a minimum of three years because the markets have a good probability of performing well over that period. As Warren Buffett says: “Why scrap an informed decision because of an uninformed guess?” Don’t panic because you think you’ll know what will happen next week — stay in because you know what will happen in the long term. Create and fund your Rise stock plan today.