Buying low and selling high is easier said than done. Fear, greed, an inflated sense of forecasting and other biases constantly muddle the decisions of experts and novices alike. And yet, there’s a frequent scenario in which many investors adhere to a distorted version of the “buy low, sell high” adage so rigidly that it works against them. With the stock market regularly posting a new all-time high, this scenario has been in full view recently.
As of November 12, 2019 the S&P 500 sat at 3,091.84. The current bull market is more than 10 years old, and an investment in the S&P 500 on March 9, 2009 when stocks bottomed out would have returned over 465% (17.61% annualized). It’s easy to understand why investors, particularly those who recently came into a lot of cash (from an inheritance, a business sale or otherwise) would be hesitant to invest that money in the stock market today. There’s no time you’re more likely to be cautious of buying high than when the market is making new highs regularly. We often hear about investors wanting to wait for a dip during times like this—perhaps sit on the cash until there’s some market volatility and prices fall by 10% or more before jumping in. This tendency is understandable but misguided. It’s difficult, if not impossible, to identify when the stock market has peaked, and it’s just as possible for the market to increase by another 20% from its current high as it is to fall by 20% or more first. By sitting on the sideline, investors often miss out on successively larger gains and become the victim of a feedback loop in which higher prices make it increasingly difficult to invest.
Since the S&P 500 recouped its losses from the Great Financial Crisis (February 2013 established the first new high of the current bull market), the market has recorded a new all-time high in 37 different months. Inherent in the conversation—whether on TV, with clients or around dinner tables—during each of these periods is the question of whether the bull will continue to run and whether investors with cash on the sideline should jump into the market. It becomes particularly common when the index hits a round, arbitrary number like the S&P 500 hitting 2000 in August 2014. No one knew then if the bull market would continue, but in hindsight had you been too cautious to “buy high” you would have missed out on a 76% return by now.
Take another, more drastic example: Imagine you have the worst timing possible and invested all your cash on October 9, 2007—this was the peak of the previous bull market. As long as you didn’t panic and sell as your account balance fell by more than half over the next year and a half, your investment today would have returned an average annual return of 8.14%. The takeaway is that yes, eventually one of these new all-time highs will be the peak day of this bull market, but if you are investing for the long term, then history shows that even that day wouldn’t be a bad one on which to buy in.
Should you put cash to work for you in today’s market? It depends on your goals and your timeline. If you’re a decade or less from retirement then you shouldn’t be in all stocks anyway—you should also hold bonds and other diversifying assets so that you don’t have huge losses in your portfolio when you begin drawing from it for retirement income. But if stocks are generally appropriate for some or all of your portfolio, then they’re specifically appropriate now, as well, regardless of what the market’s current level is. Contact us today if you would like to learn more.