When people find out I am a financial planner, they often ask things like “The market is so high right now, where is it going to go from here? Should I pull money out of the market? Should I move it around?” In this episode of the Best in Wealth podcast, I will share how I think family stewards should react to record-high stock market prices.
Outline of This Episode
- [1:08] Club volleyball tryout weekend
- [5:05] How to view record-high market prices
- [11:28] How family stewards should treat record-high prices
- [14:39] 30% of the last 94 years saw record highs
Ignore the headlines—look at the data
At the time of recording this podcast, the S&P 500 is up almost 17% YTD. People keep expecting a dramatic downturn and are reluctant to keep investing. If you are thinking about making changes, listen to the episode I recorded about unintended market timing (and the consequences of it).
Financial journalists try to write the most dramatic headline they can to get people to read their articles. They want clicks to make money. It is their job to stoke your anxiety during record-high periods. They suggest that the laws of physics apply to the stock market (i.e. “What goes up must come down”). Article after article correlates physics with the stock market.
What is actually happening in the stock market during record highs? The stock market averages a correction—a 10% drop from its high—once a year. The stock market averages 2–3 bear markets a decade (a 20% drop from its high). There is also a recession or two per decade, which can be more devastating to the stock market.
Those of us that find those observations alarming will shy away from purchasing stocks at record highs. You may have a healthy savings account and are waiting for a pullback. But history offers evidence that investors can be rewarded for the capital they provide these companies—when the stock market is high or low.
How family stewards should treat record-high prices
You as a family steward should treat record-high prices with neither excitement nor alarm. You should treat the stock market with indifference. Today's share prices reflect every stockholder's collective judgment on what tomorrow’s earnings and dividends are likely to be. Who in their right mind would invest in the stock market if it did not have a positive expected return?
The stock market is expected to go up and that is why you invest. Over the long run, stocks do better than bonds. Bonds do better than cash. You expect a higher positive return and in return, you have to put up with corrections, bear markets, and recessions.
What 94 years of the S&P 500 tells us
Reaching record highs is the outcome you should expect. And we are constantly reaching record highs. Why would you not want to see record highs regularly if you are expecting decent returns? The market fluctuates and there are bad months, years, and decades.
Using month-end data—over a 94-year-period ending in 2020—the S&P 500 produced a new record high in more than 30% of those monthly observations. That means, that one out of every three months, there is a record high. Stop waiting to invest. Stop holding your money on the sidelines. You could be missing positive returns.
Purchasing stocks, mutual funds, and ETFs at all-time records, on average, has generated similar returns over one, three, and five-year periods compared to purchasing stocks on a sharp decline. Want to hear what those statistics are? Listen to the whole episode to learn more!
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.