How to Invest in Stocks at All-Time Highs
Stocks Just Hit All-Time Highs…Time to Bail?
One question I get a lot from readers concerns stock prices.
“Rob, the stock market has risen so much so fast. Is this really a good time to invest?”
I get where they’re coming from. Everyone feels antsy when stocks hit new highs. It seems like they can’t go any higher.
You shouldn’t lose too much sleep over the market, though. In fact, I’m buying stocks even at these levels. Waiting on the sidelines is exactly the wrong thing to do.
Let me explain…
Stocks look expensive.
Markets have gone straight up for years. Around the world right now, shares have hit new high after new high.
From a gut-feeling point of view, I understand. Everyone gets nervous when they see big numbers printed on the tape. Who wants to buy high only to see their shares trade lower a few weeks later?
I suppose that would be a real concern…if I were trying to get you to play the market.
My colleagues and I in the media should take the blame for this idea. We’ve given people the impression that a smart investment decision depends on where stocks will be in a week, a month, or a year from now. It’s a huge misconception and our industry needs to fess up for such a disservice to the public.
This decision is about becoming the part-owner in some of the largest, most profitable businesses in Corporate America… and putting them to work for you over the next few decades.
I don’t know where stocks will go over the next 25 years (although I’d never bet against the U.S. of A). The situation, though, isn’t all that different from 25 years ago—when the Dow Jones traded around 3,000 and we thought the Japanese would eat our lunch. Who would’ve thought the index would trade over 21,000 points today?
I only know two things: 1) smart investing comes down to your time in the market, not timing the market, and 2) the right time to buy great American stocks is whenever you have the money.
Let me ask you: Have you timed the market well in the past?
Did you call the top in 2000? Did you pile back into stocks in 2009? No, probably not.
Well, welcome to the club. I write about this stuff for a living and still get it wrong all the time. On any day, I can always point to some smart sounding reason to get nervous.
But you know, someone didn’t invest in the Dow 25 years ago because “stocks looked too expensive.” A $10,000 sum could’ve become $108,000 today, but instead idled in cash.
The best investors I know can’t time the market, either. Instead, they buy great businesses, top off their accounts on a regular schedule, and tune out most of the financial headlines. They might not know the difference between EBIT and EBITDA, but most of them have seven-figure bank accounts.
Rant aside, the data shows stocks tend to rise after hitting new highs.
It sounds odd, for sure. In short, though, new highs tend to lead to new highs…which leads to even more new highs.
Since 1927, the S&P 500 hit a new all-time high in roughly one-out-of-ten trading sessions. Following those days, shares rose in the next session 56% of the time. If you had bought stocks after each record close, and held for the next year, you would have outperformed the typical buy and hold strategy.
Source: Yahoo! Finance
These returns won’t knock your socks off, but you don’t have big losses here, either. What’s more, these returns look consistent. One year after a record close, shares traded higher about 70% of the time.
Bottom line: If you’re nervous about new highs, my message is straightforward: don’t be.
Numbers don’t lie. The data shows new all-time highs tend to beget more all-time highs.
I’ll admit, we could be on the verge of a crash. If the past teaches us anything, though, it doesn’t really matter. The best investors buy great businesses, stick the certificates in a drawer, and tune out all of the daily noise.