We’ve all heard the adage “buy low, sell high” when it comes to stocks. But with the stock market reaching new highs repeatedly, you may be wondering whether or not it’s a good idea to invest right now, which is a completely valid question.
Investing by my definition should be a strategic, long-term endeavor. So when we talk about investing in today’s episode, we are NOT talking about money that you’ll need in the next 3 months, 1 year, or even 3 years.
Why? Because we know in the short term, anything can and will happen, as we saw recently with Coronavirus in March of 2020. There is simply no guarantee that your investment accounts will be higher in that short of a time period.
And this blog is focused on long term investing. In my opinion, the longer your time horizon, the less you have to worry about short term market fluctuations, the less you have to worry about the stock market reaching new highs, and the more confident you can be of realizing gains in your investment portfolio.
As long as you are strategic about your investments, and have a long term time horizon, investing in the stock market makes a lot of sense, even when it’s reaching record highs.
If you’re still a little gun shy in investing at stock market highs, here are four things to consider (ie, four reasons why I want you to reconsider):
1. Consider Lost Opportunities
Predicting the perfect time to sell (the “high” of the market), and then selecting the “low” baseline to buy back in is incredibly difficult.
The last couple of years have shown us that.
For instance, in 2019, the US stock market was up nearly 30%. Investors were anticipating the nearly ten-year Bull Run since The Great Recession would finally stop. This widely shared conviction, coupled with the onset of COVID 19, forced the markets to a quick, 35% correction in March 2020.
Who then could have predicted that there would be dozens of new record highs before the year was over or that 2020 would end with a total return of nearly 20%, clocking in at 18.4%?
Then despite new COVID variants and lockdowns extending well into 2021 and amid significant geopolitical chaos, the market continues to record new highs almost every other week (the S&P 500 ended the year up 28%!)
If you stayed on the sidelines holding cash, because you fell for the narrative that the bull run was over and you thought that the market was “too high”, you would have missed out on nearly 50% of cumulative gains over the past two years!
The next thing you need to consider is that for several decades now, bonds and savings accounts have yielded poor returns. Interest rates have stayed close to record low rates. And to add insult to injury, inflation (also at highs not seen in years) has also eaten into individual savings.
So if you are thinking of selling because the market is too high, where will you be putting your cash? In low yield bonds and savings accounts, which won’t even keep up with inflation? How long will you keep that extra cash there while inflation eats away at your purchasing power?
2. Timing the Market Is A Challenging (or Impossible) Long Term Strategy
Simply put, there hasn’t been many (or any) people who have consistently been able to say when you should sell at market highs so you can buy back in at lower prices. Why? Because it’s such a hard task to do.
First, You need to know when to sell. And then, you’ll need to know exactly when to get back into the market, which is also impossible to do. So you have to have a type of clairvoyance that no one, to my knowledge, has really ever had.
Second, there isn’t even a need to try to time the market. As Warren Buffet says, “It’s not about timing the market, it’s about time in the market.” What he means by that is that you can increase your odds of success simply by being a long term investor, with a smart investment strategy and control of your emotions when you are fearful as the market falls.
The “highs” that we see today may very well become lows in the future. For instance, let’s say you sell in 2021, but the market keeps growing until 2024. Then in 2024 there is a correction, the moment you’ve been waiting for to get back into the market. Well, the problem with that is that the new, lower price in 2024 may actually be higher than the highs of 2021!
3. You stack the decks in your favor when you have a longer term time horizon
Some great research by Blackrock has shows that you have only a 62% chance of making money if you hold for a month. But, that probability rises to 99.8% if your investing horizon is 15 years or more.
Again, I can’t, and no one can, tell you what’s going to happen in the short term. But you don’t even need to play that game. You can quite easily stack the decks in your favor by focusing on that long term time horizon, that accounts for investing for two to three decades. And if you’re retiring in your 50s, 60s or even 70s, then you’ll want to be invested for at least 20 more years.
Source: Blackrock
4. The best days of the stock market occur right after the worst days
This is a really interested tidbit: 7 out of the 10 best performing days in the stock market arrived within two weeks of the worst performance days. So if you miss out on the bad days, you will likely miss the great days, and those great days really propel your long term returns.
Looking at the data, over the past 20 years, if you only missed out on the ten best days, your return will climb down by over 50%, from 7.47% to only 3.35%. The return falls exponentially as you miss more good days. So the longer you hold your position, even at the highs, the greater the likelihood of a solid return.
Source: Blackrock
Conclusion
We all want to invest when the market is low to maximize our returns. I get it, we all feel that way. And that tempts us to sell, in anticipation of some kind of correction.
But what you have to consider is that you can’t predict the news, or how the stock market will respond to any specific set of news. You have to consider that historically, stocks have performed better than any other asset classes, and it isn’t close. You have to consider that you stack the deck in your favor by being a long term investor. And lastly, you have to remember the best days in the market come right after the bad days, so it simply pays to stay invested.
My advice? I would encourage you to be a strategic, long term investor, confident in the knowledge that if you can pick a well diversified investment portfolio that you will be rewarded for your patience and confidence, if you can stick with it in good times and in bad.
So if you’re looking to invest as part of your retirement, which hopefully will last three plus decades, investing now while the market is at all time highs can still make a lot of sense.
If you would like to make sure that your investments are aligned to generate you a retirement income for 3 plus decades, you can get a free one page plan from me when you book at a call with me at StartMyRetirement.US.