From Surfing to Streaming
The world of channel surfing, TV guides, rushing to get home for the newest episode, and commercial breaks seem like a lifetime ago. In the day and age of streaming, the television experience just isn’t the same. No looking forward to that newest episode of Seinfeld or Friends, just binge-watching whatever the latest pop show of the week; the revolving door of trending shows.
MythBusters
One of my favorite shows to stumble upon while channel surfing in the early 2000s was MythBusters. The quirky duo of Adam Savage and Jamie Hyneman would “nerd-out,” challenging each and every potential myth they could come up with:
- Will using a cell phone near a gas pump cause an explosion?
- Was it possible to survive an escape from Alcatraz?
- Can the venom from a daddy-long-legs spider kill a human?
Each hypothesis (myth) tested and determined with a “busted” or “confirmed” conclusion.
Maybe you’ve spent a lifetime waiting 45 minutes after eating before going for a swim, and right now, you’re wondering if mom’s advice was grounded in truth. The world of personal finance is full of these myths that must also be challenged and tested. That’s another topic for another blog, but instead, today, we will address the common investing concern – is it best to avoid investing when markets are at an all-time high?
A Dime A Dozen
First, we need to determine how often these events occur. Are all-time highs a norm or a rarity?
Blogger, Michael Batnick, notes a 37-year period (1982 -2019) in which the market recorded 777 all-time highs. The average one-year (price) return for the time period was 10.2%, and the average one-year return following an all-time high? 11.5%. That’s right, the performance following an all-time high for this sample period yielder a GREATER result than the general average.
Our intuition leads us to believe that markets are subject to the rules of gravity – what goes up must come down. But, in reality, markets are the summation of American businesses, businesses that measure their results regularly and are striving to outdo last month’s, last quarter’s, last year’s results. Great companies thrive, struggling companies lay by the wayside, and the aggregate tenacity and industriousness of the US market continue to improve AND set new all-time highs.
All-time highs are the rule, not the exception; the expectation, not the hope.
Unfortunate Timing
With data points like those referenced above, where can we conclude that this “myth” comes from?
Why are investors so hesitant to invest when markets are at an all-time high?
To help understand this, let me ask you a question – do you have any embarrassing childhood memories? The types of stories that start with, “When I was in the third grade…” Some of these memories are scarring and would rather not be relived, and some are humorous and are retold at each family gathering. Regardless, these stories/memories have a way of defining an entire year of your life. Maybe you don’t remember anything else about the third grade outside of that time chocolate milk squirted out your nose when you couldn’t stop laughing. These are the type of memories that are branded in our memory bank for a lifetime.
Investors have these moments too. Investment horror stories, fearful market moments, unsettling memories of losses. In those 777 all-time high record-breaking days, a handful – a minority of days – represented a cliff. A peak price was followed by an unforeseen and aggressive decline when the Dow Jones broke 29,000 in the middle of January 2020 before tumbling to a COVID bottom on March 23rd or in early October of 2007 when the Dow hit an all-time high before entering the great financial crisis of 2008.
The handful of textbook dates are those unfortunate occurrences that blind our memory bank. We know where we were, what our account dropped to and can recall the feeling of defeat when seeing portfolio values get cut in half.
These moments are the exception, not the rule, AND they capture all of our attention.
Patience is a Virtue
Even purchasing at a peak can result in a good outcome IF the investor is willing to be patient. Not to say that all businesses (stocks) will bounce back, but rather the expectation of a broadly diversified portfolio.
Buying the market (S&P 500) at the peak (October) of 2007 resulted in watching a portfolio reprice down nearly –36% in the first twelve months (dividends reinvested). Five years later, an investor was barely positive, compounding at less than 1% for the time period. BUT 10 years later, returns were compounding north of 7.4%, and today, nearly 14 years later, the results are knocking on the door of 10%.
This is not only a lesson in patience but also a lesson of intent. What is or was your intent when you bought this basket of stock? Was it to use these resources for an upcoming expense? Or to let it sit for 20+ years until retirement, or perhaps you didn’t have a plan at all. Let me help you out with some straightforward guidance – don’t invest in stocks if your holding period is less than 10 years. This rule of thumb helps put you in a statistically favorable position. Historically, markets have been wild and crazy, but this craziness tends to dilute itself over time. If you don’t have that long of a runway to stay invested – 10 years – then you might not have any business in investing in stocks. This is how one turns investing into gambling when the expectations around results are so short-sighted.
All Time Lies
So, what do we conclude about this myth? Confirmed or busted?
Busted.
Investing at all-time highs should not scare you. The all-time high myth is an all-time lie.
Your lifetime will be chock-full of new record-breaking market moments – all-time highs. Markets will frustrate you and puzzle you. Your portfolio will often take two steps forward and one step backward. This is the nature of investing.
Your job? Fight through the noise, separate the myths from the truths, and constantly temper yourself with your financial plan – a well-thought-out, descriptive plan that maps your financial objectives.
… and you have my complete and full permission to jump in the pool right after lunch – no waiting period needed. Let’s not let busted myths get in the way of you going out and living your best life.
