All time highs
January 30, 2018 | By Kevin Smith
|The level of anxiety about markets increasing dramatically is beginning to boil over. There are a variety of reasons working together to cause these feelings, often triggered by the recently common headline “New record highs!”
There is a prevailing thought that record highs must mean it is time for a ‘correction’ or perhaps the end of the bull market. This has not been the case for most record highs over our stock market’s history. Here is 118 years of the Dow Jones Industrial Average. Looking at this helps us zoom out and think about the big picture.
This article breaks down the data in the chart and points out that someone who invested for 40 years would have historically experienced about 500 ‘market highs’, or about 12 of these announcements per year, spending most of their days below the last all-time-high. This is the investing experience. Most of those 500 market-highs were not useful signals. Market returns were positive in 3-5 year periods following these high water marks about 70% of the time.
If we make decisions to exit the market based on all-time-highs, and then attempt to re-enter at the optimal time, we will be wrong most of the time. The cost of being wrong can be detrimental to achieving your minimum required long-term return on investment.
If you read this and your level of anxiety remains very high, we should address it. You are not alone! You are not wrong to feel this way. There are plenty of valid reasons to believe that market risk is high. The challenge is that humans are not wired to make long-term risk/reward trade-offs, so our short-term instincts often interfere with our rational thoughts. We need tools to balance these competing forces.
There are reasonable adjustments that can be made to balance risk aversion with the need to generate returns in excess of inflation over the long haul.
– Kevin X. Smith, CFA
Return to Blog Page