New Market Highs: Is it too late to invest?
Earlier this month, the S&P eclipsed the January 2022 previous market high. A new market high can feel like bad news for investors who have been sitting out of the market, patiently waiting for a big correction in order to buy stocks at lower prices. These investors nurse their frustration with the hope that the market will crash soon. Unfortunately for investors waiting for another crash, markets typically keep climbing after hitting a new high.
Source: https://awealthofcommonsense.com/2024/01/animal-spirits-new-all-time-highs/
Thanks to Ben Carlson for the chart above showing market rises and declines going back to the 1950s. The table shows market returns one, three, five, and ten years after having hit a new high. With only a handful of exceptions, the market has climbed higher, looking out five years from the previous high. Looking out ten years from a new market high, the market has always been higher! Disclaimers here are appropriate; just because this is what has happened historically does not mean this is how the market will behave going forward. Having said that, human emotions—which date back to Adam—are what drive the stock market.
The Fear And Greed Cycle
Many of us are familiar with the sensation of having negative feelings toward someone who has had something good happen to them. I can also think of many times in my life when I felt fearful of the future because of wars, the economy, natural disasters, or some other calamity. These same emotions of fear and greed influence all investors, and I believe this can partially explain why the market continues higher most of the time after surpassing the previous market high. As the market climbs higher, those who have been out of the market feel envious of their friends with growing portfolios. They also feel fear that they will miss out on further gains if they wait too long to get back in. Thus, the demand for the shares of great companies goes up, and so does their value.
Choosing A Different Path
Here are a few suggestions for investors of all ages to invest in ways that can help you avoid mistakes.
- Invest based on a financial plan. A good financial plan helps you clarify your priorities and goals for your life. Once you’ve created your plan, you’ll have a framework to guide your investment time horizon.
- Stay invested. One of the fastest ways to lose money in the market is to try to get in and out to avoid losses and only have gains. The market goes up most of the time, so when you’re out of the market, you are more likely to miss out on gains than losses.
- Diversify your investments. Betting your life savings on the prospects of a single company’s stock is one of the most foolish decisions you can make. Proper diversification eliminates extreme outcomes. By diversifying your investments, yes, you’ll miss out on having your portfolio quadruple by investing early in a great company, but you’ll also avoid losing all your money like investors in WorldCom and Enron.
It’s easy to kick yourself if you’ve made some of these investing mistakes. The worst thing you can do going forward is to give up on investing or continue to make these same mistakes over and over. Instead, try to update your ideas about investing and incorporate some of this good old-fashioned investment wisdom.
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