Afraid of New Market Highs?

The stock market notched another new high this week. That’s a sentence we hear over and over. New high this week, new high this quarter, new high this year… the new high drumbeat seems to get louder and louder. Is it time to sell? Time to run? Time to invest more? What to do? Our advice: read this article before doing anything.

New Highs are Normal and Frequent

The Dow has climbed from approximately 150 to its current levels north of 23,000 over the past 90 years. You need a lot of new highs to make that impressive ascent. But then what happens? Once a new high is reached, the market can only do two things — continue to climb, or slide backward. We know that many investors expect the latter and nervously reduce holdings at new highs. The evidence shows this is a mistake.

A new closing high has been followed by additional positive total returns over the subsequent year 80% of the time. Think about it. Think back to the time when you first heard Dow 10,000, Dow 1,000, Dow 20,000. Think back to last year’s election when the Dow was at 19,000. Those old new highs — no matter how lofty or unrealistic they may have seemed at the time — were good times to make long-term investments. As long as you haven’t bailed out during a temporary dip, you are ahead from all of those previous high levels.

Yes, the market does go down. We know that bear markets can be agonizing. But for patient long-term investors who haven’t been scared out during pullbacks, the overwhelming direction of the market has been up. So how high can it go?

Dow One Million

Warren Buffett has stated publicly that the Dow will go to 1,000,000. That is 40 times higher than the current level. Unbelievable? Not over the next 100 years, as Mr. Buffett said.

If you do the math, the Dow will be at one million in 100 years with only a 3.9% annual return. That 3.9% is a low hurdle to clear and way below the historical return in the US stock market over the last 100 years. Based on history and the relentless force of compounding, Buffett’s “Dow One Million” statement looks to be a fairly safe strategy for a long-term investor like his insurance companies….or a multi-generational family. Personally, I invest with a 100-year time frame.

The Age Effect

If new highs are so common and tend to lead to more new highs, why do many investors fear them? I guess it’s common sense to expect anything that goes up must come down. That’s a good law in physics, however, capitalism is not constrained by gravity. With expanding population, new technologies, greater productivity and easier access to capital, companies continue to produce higher earnings, bigger dividends, and therefore, higher stock values.

My experience is that older people tend to fear new highs more than younger people. Based on my unofficial sampling, I’ve observed that those over 40 are somewhat fearful about new highs. Perhaps it is because they remember more big declines than younger investors, including the devastating slide of 2008-09 from which, by the way, stocks have completely recovered and reached much higher highs.

Onward

Regardless of age, we encourage all investors to look at new highs as common and inevitable, not as signals to sell. If you are a saver, spend less than you make, and invest regularly you will benefit from the stock market’s long upward march.

Research shows that only 1/3 of investors are currently comfortable with their investment portfolios. If you’re interested in a free performance review, click here.