We have seen incredible wealth created over the past 18 months, so what is it that makes investors nervous? Why are so many Oklahoma people wondering, “Are stock prices too high?” It seems that the new highs themselves are causing concern.
The S&P 500 Index has compounded at over 16% per year over the past 10 years, which is well above the long-term average of around 10%. This year alone, the S&P 500 Index closed at a record high more than 50 times.
So, it is at times like this that many will say that the market is too high and is surely doomed to fall or even collapse. Moreover, it was only last year that we experienced the COVID crash, when stocks fell 34% in 33 days, the fastest market decline in history.
With the horrific market downturns in recent history, such as the COVID crash or the 2008 financial crisis, it can be tempting to try and predict the next downturn. A big problem with the calendar approach is that it’s just a guess, and one bad move can hurt your financial plan.
Review what the story tells about investing during historic highs
Would you be surprised to know that investing during historic highs has little correlation with determining stock returns over the next five years?
Certainly, new market highs automatically ensure that the markets are ready to collapse, don’t they?
The story tells another story. Since 1926, after hitting new market highs, stocks tend to be higher one year, three years and five years later.
Remember why you are investing
It is also essential to remember the âwhyâ when investing. Just as long-distance runners who train for a marathon remember why they run so many miles, we need to remember why we invest in an uncertain world.
Long-term investing should always be aligned with your most important goals, such as creating a future stream of income that is independent of your job or business. Or you might want to make sure your children or grandchildren are able to go to college without carrying the burden of large student debt.
The “why” provides the stamina to survive the fear of being invested in the next market downturn. Just as goals are crucial for the marathon runner, important and personal goals give us the motivation to deal with short-term uncertainty.
Prepare by focusing on what you can control
While many people will be looking for the next stock advice or ways to enter and exit the market at the right time, seasoned investors stick to the timeless principles of successful investing and stay focused on what they can control. .
There are four basic strategies to prepare for the next market downturn:
- Stay invested and ignore the predictions and the noise. The best thing you can do as an investor is to make sure that your investments always match your goals. If that’s still the case, the best thing you can do right now is stay invested.
- Review your money and your obligations. If you are withdrawing money from your account, it is important to hold high quality bonds to protect yourself against the next drop in stocks. Holding bonds in a low interest rate environment will ensure that you don’t get high returns on those positions, but you will be happy to have them.
- Diversification is your best friend and the only âfree mealâ when it comes to investing. Good diversification means that you will likely see part of your portfolio go down while other positions go up. Of course, diversification will prevent you from making a fortune when certain stocks go up, but it will also ensure that you live to fight another day when other stocks go down.
- Control how much you save and spend. We have no control over what will happen with the markets over the next few months or even years. But we can still control our spending and our savings plans. If you’re still in accumulation mode, don’t slow down your long-term savings plan because your investment plan has worked well – keep your foot on the gas with savings.
So, should you continue to invest during historic highs? Absoutely. If you have a clear investment objective, focus on the long term, stay diversified, and hold enough cash and bonds to deal with short-term uncertainty. It’s still a good time to invest!
Kendall King is the Founder and CEO of Castlepoint Wealth Advisors in Oklahoma City.