We’ve all heard the saying, “buy low, sell high.” It’s an adage that’s been around since the dawn of man. If we own something valuable, we should sell it for more than we paid. And if we’re buying, it’s better to buy at a bargain price than an all-time high price. This common wisdom can create quite the conundrum for investors today.

All-Time High Trivia

In the first half of this year alone, the S&P 500 hit more than 25 new market highs. If you’re curious, the record is 77 in a single year (set in 1995.)¹ Choosing to buy high (or investing cash now) seemingly breaks the first portion of Investing’s First Commandment of “buy low, sell high”. And not selling now breaks the second half.

To add more intrigue, investors face additional worries: geopolitical tensions in the Middle East and Ukraine, an upcoming presidential election, and inflation and interest rates that are higher than preferred. So, what’s an investor to do?

Learning from History

Well if you believe Mark Twain, “History doesn’t repeat itself, but it often rhymes.” Let’s take a look at what history has to say about the idea of buying high.

The above chart shows market returns for 1, 3, and 5 years following each new market high over the past century. Surprisingly, both three- and five-year returns look awfully similar to the market’s long-term 10% historical return. One-year returns look even better.

This suggests that buying high, or staying invested amidst new market highs wouldn’t be one of my biggest investing mistakes, or yours. But it begs the question – how does it compare to investing after market declines? Let’s take a look.

No, I didn’t mix up the charts, and yes, you’re welcome to scroll up and look again. The returns are higher across the board after new market highs than after the market has declined by 10+%. Maybe the saying should be “buy high, sell higher.”

Sidenote: in these types of charts, I’m most interested in the five-year returns because I’m a long-term investor. If you have a one-year time horizon, that money shouldn’t be invested in stocks unless you like Russian roulette. As a long-term investor, the one- and three-year returns are mostly just noise or distractions.

Key Takeaways for Investors

As we sit near all-time market highs, here are five points to consider:

1)      Assumptions are Just That – Believing it’s a bad time to invest (or stay invested) is an assumption. And we all know what happens when we assume.

2)      Investing is Always Hard – Whether the market is low or high, investing can be challenging. Success comes from understanding why the hard is worth it.

3)      Rebalancing your portfolio – Some parts of your portfolio may have bigger winners than others. Now’s a good time to trim the winners that have grown too much and add to positions that haven’t performed as well.

4)      Automate Your Investments – Reduce emotional decisions by setting up an automated investing plan because investing at market lows and highs is hard. Include clear reasons for why and when you’ll sell investments as part of your financial plan. Reducing the impact of your emotions on your portfolio will likely enhance your long-term returns.

5)      Stay Invested – Last and most importantly, long-term returns are virtually identical whether the market just hit a new high or fell by 10%. It pays to remain invested during market peaks and valleys.

New market highs can feel scary for investors because of the sense that what goes up must come down. The negativity in the news doesn’t help, either. Fortunately, as history shows, the laws of gravity don’t apply to investing. If stocks are expected to grow, reaching record highs with some frequency is normal. The moral of the story is buy low or buy high but most importantly, have a long-term focus and be prepared to ride the roller coaster.

Castle Quote: “Wealthy people invest first and spend what’s left and broke people spend first and invest what’s left.” – Anonymous

Source: https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/