Investing in Stocks at All-Time Highs (EP.137)

0:28We all need to make smart decisions with our money. That has been covered a lot across all media platforms. Investing in the stock market at all-time highs. In an ever-evolving landscape of the stock market, reaching all-time highs can often be perceived as a double-edged sword by investors. While such peaks are a testament to the growth and resilience of the market, they also bring a sense of caution and uncertainty. On one hand, your existing investments are soaring, and on the other, there's this worry of are we on the brink of a downturn? Let's dissect this. So looking at the S &P 500 data that goes back to 1926 provides some pretty useful perspective.

1:10For starters, roughly 30 % of closing levels have been new highs. And following these all-time highs, the market has shown a tendency to continue its upward trajectory. So if I'm just to look at the average annualized returns of the market after making an all-time high, the one-year following on average has had a 13.7 % return. Whereas if I'm looking three years out, it has averaged an annualized return of 10.6 % and 10.2 % in the five years following a new all-time high. And those three - and five-year figures align pretty closely with what the market's overall average performance is across similar timeframes.

1:51So that should give you confidence for what lies ahead. And while the market doesn't always go higher, historically, we've seen that the market is higher 82 % of the time one year after making a new all-time high. But the common misconception among many investors is this belief that a peak must invariably be followed by a decline. The notion is often fueled by the sensationalist financial journalism, but also just this human tendency to expect reversion and overlooks the fundamental nature of stocks. You see, stocks represent the perpetual claims on a company's earnings and dividends, grounded in the continuous efforts of businesses to innovate and provide value.

2:35And as such, they're priced with a positive expected return, making the achievement of record highs a likely and even regular occurrence. The key to navigating market highs lies in maintaining a long-term perspective. When you have broad market exposure, the risk and uncertainty that you assume is compensated with higher long-term returns than what you'd earn in bonds or cash. Said another way, the risk and uncertainty you assume when investing broadly in the stock market is simply the cost of higher expected returns. You can't have equity returns without equity risk. Yes, it would be profitable to avoid the downturns, but that's not really possible to do without missing out on substantial parts of the up markets, which are both disproportionately larger than the down markets and last a disproportionately longer period of time.

3:29As a long-term investor, you must embrace losses. They are incredibly normal. In fact, the S &P 500 averages a 10 % loss about every 12 months. So any such pullback should always be expected. And historically, 20 % drops happen roughly every 3.6 years and the 30 plus percent drops about once a decade. But historical data illustrates that downturns, while inevitable, are often followed by robust recoveries. Ben Carlson of A Wealth of Common Sense put out a great piece that I will link to in the show notes at thelongterminvestor.com that shows the average performance of the S &P 500 after enduring a bear market.

4:12He shows that over the 1, 3, 5, and 10-year periods, the S &P average returns of 16%, 27%, 59%, and 206 % respectively. This resilience underscores the importance of staying the course, as attempting to time the market often leads to missed opportunities. So acknowledging and accepting these market fluctuations is vital. Recognizing these patterns as a normal aspect of market behavior is absolutely crucial. Instead of trying to predict when and why the next downturn will occur, you should plan on them occurring with a similar magnitude and frequency as they have in the past. To sum things up, investors should approach market highs not with trepidation, but with informed confidence.

5:02By focusing on long-term strategies, diversification, and a rational understanding of market dynamics, investors can navigate these peaks with a clear vision, turning what seems like a precarious position into a vantage point for future success. As we come to a close of today's discussion, I have a small but important request for all you tuning in. If you found value in today's episode, please take a moment to subscribe to The Long-Term Investor. It's a simple click for you, but means the world to me. And if you're feeling particularly generous, leaving a review would be incredibly appreciated.

5:39Your reviews not only help me improve, but assist fellow listeners in finding our podcast. So share your thoughts, tell me what you loved, or even tell me what you'd like to hear more of in future episodes. Your feedback is going to be that compass that guides my content. So hit that subscribe button, drop a review, and let's continue to grow and learn together. Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan.

6:27This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.