An Irrelevant Metric

Is it safe to invest when markets are at all-time highs?  This is both a common question and a valid one.  We derive many of our investing instincts from the natural world.  Sir Isaac Newton taught us that everything that goes up must come down and we intuitively apply this truth to our beliefs about markets.

But is it true?  Does a new all-time high mark an apex.  Does it provide a clear signal that things are about to turn negative?

In David Bahnsen’s recent Dividend Cafe podcast he coins “all-time highs” as the most irrelevant metric.  David goes on to point out that in the past decade the market has achieved new all-time highs 215 times.  David concludes with candor, 

“I want to gently, intelligently, and clearly expose the problem with the thinking that an all-time high tells you anything whatsoever about what happens next.  It is stupefyingly bad logic, and I cannot begin to calculate how much damage it has done to people to play into this thinking 214 times over the last decade.”

David’s conclusion is accurate and I have seen it first hand.  Investors use this false signal (all-time highs) as a timing mechanism to trigger a sale and their game plan is to “wait on the sidelines” until a more attractive entry point (purchase price) presents itself.  More often than not, that time never comes and one is left missing out on the compounding benefits of staying invested.  And as David describes, by this point the financial damage has already been done.

Maybe you’re still not convinced.  I understand, our instincts, whether right or wrong are hard to break and we hate nothing more than the thought of potentially losing money.  Here’s a fun illustration, that I think might be helpful.  Meb Faber of Cambria Investment Management, ran a basic backtest to calculate the returns if you were to only own stocks when they were at all-time highs.  Here’s the simple rule he set up for this test, “check at the end of each month…if stocks are at an all-time high, then you invest in stocks for the next month, and if not, then bonds.”  Here were the results going back to 1926:

Source: Meb Faber

So, did the results align with your assumptions?  I will speak for myself and say, most definitely not.  This simple rule of buying at all-time highs produced a better outcome than being invested the whole time.  Wow! I did not expect that.

Now, just so I don’t lead you astray, this would not be an advocation to implement this “buy only at the highs” strategy.  If you were to dissect the data and graph above, you’d find that diversification was one of the biggest contributing factors to the outperformance – the fact that you owned both stocks and bonds.

The real takeaway though is that all-time highs should not be feared.  What David labeled as an irrelevant metric is exactly that, not a signal of any sort but just noise.  So, although talking about all-time highs makes for good headlines and some may use it to instill fear about the future, remember to just ignore the noise.  Hopefully, you’ve designed an investment portfolio based on a financial plan tailored to your goals and needs.  Sticking to this plan is priority number one and you cannot let your instincts, some fearmongering pundit, or the financial media derail you from your plan.

The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Author

Trevor Cummings

Private Wealth Advisor, Partner

Trevor is a Private Wealth Advisor focused on building customized financial plans for his and many clients of the team.

As the author of TOM [Thoughts On Money], Trevor endeavors to write and speak about financial concepts and principles in a kind of “straight” talk demeanor and posture.

He received his Bachelor’s degree in Organizational Leadership from Biola University and his MBA from California State University, Fullerton.


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