We’ve seen incredible wealth created over the past 18 months, so what is causing investors to get nervous? Why are so many Oklahomans asking each other, “Are stock prices too high?” It appears the new highs themselves are causing the concern.
The S&P 500 index has compounded at over 16% a year in the last 10 years, which is much higher than the long-term average of around 10%. This year alone, the S&P 500 index has closed at an all-time high over 50 times.
Thus, it is during times like this when many will comment that the market is too high and is surely doomed to go lower or even crash. Also, it was just last year when we experienced the COVID crash, when stocks went down 34% in 33 days, the swiftest market decline in history.
With horrific market downturns in recent history, such as the COVID crash or the 2008 financial crisis, it can be tempting to try to time the next downturn. A big problem with the timing approach is that it is merely a guess, and a wrong move may be harmful to your financial plan.
Revisit what history tells about investing during all-time highs
Would you be surprised to know that investing during all-time highs has little correlation with determining what stocks returns will be in the next five years?
Surely, new market highs automatically ensure the markets are ready to tumble, right?
History tells a different story. Since 1926, after hitting new market highs, stocks tend to be higher one year, three years, and five years later.
Remember why you’re investing
It’s also critical to remember the “why” when you are investing. Just as long-distance runners training for a marathon remind themselves why they are running so many miles, we need to remind ourselves why we are investing in an uncertain world.
Long-term investing should always be aligned with your most important goals, such as creating a future income stream independent of your job or business. Or you may want to make sure your children or grandchildren are able to attend college without carrying the burden of large student loan debt.
The “why” provides the endurance to survive the fear of being invested during the next market downturn. Just as goals are crucial to the marathon runner, important and personal goals give us the motivation needed to deal with short-term uncertainty.
Prepare by focusing on what you can control
While many people will look for the next hot stock tip or ways to get in and out of the market at the right time, seasoned investors stick with the timeless principles to successful investing and remain focused on what they can control.
There are four core strategies to being prepared for the next market downturn:
- Stay invested and ignore the predictions and noise. The best thing you can do as an investor is ensure your investments are still aligned with your goals. If this is still the case, the best thing you can do right now is remain invested.
- Review your cash and bonds. If you are withdrawing money from your account, it’s important to hold high quality bonds to protect yourself against the next stock downturn. Holding bonds in a low interest rate environment will guarantee that you don’t earn high returns from these positions, but you will be thrilled to have them.
- Diversification is your best friend, and it’s the only “free lunch” when it comes to investing. Proper diversification means you will likely see part of your portfolio going down while other positions are up. Sure, diversification will keep you from making a fortune when certain stocks go up, but doing so will also ensure that you live to fight another day when other stocks go down.
- Control how much you save and spend. We have zero control over what will happen with the markets in the next few months or even the next few years. But we can always control our spending and our savings plans. If you are still in accumulation mode, don’t slow down your long-term savings plan because your investment plan has done well — keep your foot on the gas with the savings.
So, should you keep investing during all-time highs? Absolutely. If you have a clear goal for investing, focus on the long term, stay diversified, and hold enough cash and bonds to deal with short-term uncertainty. It’s still a great time to invest!
Kendall King is the founder and CEO at Castlepoint Wealth Advisors in Oklahoma City.