Downturn ahead, who knows? But don’t bet on it.
“All-time market high.”
Depending on what kind of investor you are, that phrase can elicit emotions ranging from abject fear to utter joy. And given the market volatility of the past year, some investors can’t figure out how to feel. Is a market high good or bad? Am I doing the right thing with my portfolio, or am I missing out?
It makes sense that my colleagues and I have been fielding lots of questions lately from our clients about market highs since the financial news media continually floods our newspapers, social media feeds, and the evening news with stories about market highs. The S&P 500 (S&P) alone reached more than 50 new highs in 2021, and the Dow Jones Industrial Average (Dow) reported dozens of record highs this year.
The problem as I see it is not in the reporting of the facts – that the S&P and Dow have both reached record highs yet again – but that this “news” isn’t actually new. Indeed, people who have been invested for the past 30 or 40 years have seen thousands of market highs. Further, more often than not, this “news” about a market high is almost always followed by cryptic questions and implications that these highs will inevitably be followed by a crash.
This same story has been told thousands of times, but what historical data shows is that the market tends, over time, to go up. While, of course, we have witnessed severe market drops in our lifetime, even despite these downturns, the market continues to reach new highs.
One important point to make here is that the "market" in many media stories refers to two indices - the S&P and the Dow. The Dow is comprised of 30 stocks, and the S&P has 500.
Yet a diversified investor should have thousands of stocks in their portfolio from several different asset classes. With a carefully crafted and diversified portfolio, an investor will likely not experience as drastic an impact from any given stock market peak or valley.
Media outlets do a disservice to investors when they publish fear-based headlines and articles to grab readers’ attention.
But it’s simply human nature to expect a fall after a rise, and financial journalists, after all, are only human. We have heard the maxim “what goes up must come down” for so long that we subconsciously believe that our portfolios also follow the laws of physics. A headline suggesting that the stock market has recently defied the laws of gravity confirms our biases by grabbing our attention and stoking our anxiety.
In truth, the market reaching an all-time high gives us no additional information about expected returns going forward. The temptation is incredibly strong to abandon the plan as soon as the road gets bumpy, but the data confirms that market timing is not a sustainable strategy for building wealth. As my colleagues and I have presented for years, disciplined investing means shutting out the short-term noise and committing to an evidence-based investing philosophy.
It has been said that investing is not for the faint of heart. Humans are emotional creatures who respond and react to perceived threats in emotional ways. Add in huge emotional forces like legacy, generational wealth, and the inevitability of death, and suddenly it seems crazy NOT to react to outside forces that threaten you and your family’s futures. But perception is everything.
For example: rather than expect a crash, another way to look at a new record high is that no matter how much value your portfolio “lost” during the most recent downturn, if you stayed invested, you have more than made up for that loss. But however you look at it, finding optimism in the depths of a crisis will help you find your way out. Optimism comes easy to some and not so easy to others, so this is where the discipline of investing becomes an essential component of your financial journey.
As we have said many times, successful investing takes discipline. Sometimes an investor’s discipline comes in the form of saving instead of spending; sometimes, it looks like following the advice of trusted counsel; and sometimes, it entails challenging their own biases and avoiding the panic trap.
It also helps to pay less attention to the “news” about the stock market’s performance. Investors should consider looking at their accounts less often, but when they do, take more time to better understand the investment performance.
I think we have all witnessed time and again that fear is used very successfully in grabbing attention. But it is our decisions following that fear that ultimately make the difference in our long-term happiness and success. Warren Buffett famously said, "We have long felt that the only value of stock forecasters is to make fortune-tellers look good.” Let us remember that the next time we read a headline that pretends to know the future.