Episode #28- Investing Near All-Time Highs

Wealth Decisions Podcast Transcript for Episode #28- Investing Near All-Time Highs

Listen to this episode on Apple Podcasts or Spotify

Welcome to The Wealth Decisions Podcast, where each week I take 15 minutes or less to discuss crucial wealth decisions and mindset hacks to help you live a richer life.

I'm your host, Brian Muller, and I've been in the financial services industry for over 25 years, and I'm also a certified life and health coach.

Now I have a passion for helping people make better decisions around their money and their life.

So for the sake of time, let's dive right into it.

In today's episode, I'm going to be talking about a topic I think is on a lot of investors' minds, and that's investing near all time market highs.

You might be feeling a little nervous about maybe putting new money to work in a market that seems maybe to have really nowhere to go but down.

But we're also, a lot of investors are worried about missing out.

The fear of missing out kind of sets in on potential gains.

You're not alone.

We all probably think the same things when the markets are reaching all time highs.

But today, I just want to explore some of the challenges.

I'm going to talk a little bit about some strategies and some opportunities when investing with markets near all-time highs.

You know, I've said in past episodes that when you look at the long term, whether you're looking at 30, 40, 50 years, and you look at a stock market chart, and you'll notice that the trend is in an upward direction, kind of looks like a mountain.

And I always will typically say that the market is a place of temporary downs and permanent ups.

To understand what it means when the market reaches all-time highs is pretty clear.

It means that the major averages, whether that's the Dow jones Industrial Average or the S&P 500 or the NASDAQ, are near all-time highs.

And you tend to get a lot of analysts and people predicting or putting target prices on these various indices.

But target prices really don't mean much.

In terms of how well the market can do, all comes down to how the economy is doing and how individual companies are doing.

In the short term, the stock market is driven by two things, fear and greed.

But in the long term, the stock market is driven by a good, solid economy and companies either meeting or beating expectations when it comes to their earnings.

It's really important just to note that markets reaching new highs is actually a normal thing.

It's a frequent occurrence in a healthy growing economy.

It's natural to feel apprehensive about investing when prices seem somewhat inflated.

The fear is often rooted in a concept known as mean reversion.

That means the idea that prices and returns eventually move back toward the long-term average.

But one crucial point to remember is a market high doesn't necessarily mean a market peak.

In fact, there's been a lot of research that's shown that new market highs are often followed by more market highs.

Now, we all know that trees don't grow to the sky.

We found out in 1999 through March of 2000 that things don't just keep going up.

During the tech bust, we found out that stocks can go down and go down quite a bit.

But there was a study done by Dimensional Fund Advisors and they found that from 1926 to 2019, the S&P 500 made new all-time highs in approximately one out of every five trading days.

And in the year following those new highs, the market went on to deliver positive returns about 80% of the time.

So it's always tempting to think about the expression, you know, what goes up must come down.

But the reality is market behavior is much more complex.

Markets can remain at near highs for extended periods, you know, driven by factors like economic growth and what we've seen recently with technology advancements, especially in the AI world, and also really increased productivity.

So now let's talk about some of the challenges of investing at market highs.

Some of the obstacles that all of us as investors face in this type of environment is, number one, is the fear of buying at the peak.

You know, no one wants to be the investor who buys just before a market correction or a crash.

And this type of fear can kind of lead to some type of paralysis, you know, where investors maybe sit on the sidelines and they tend to miss out on some of those potential gains.

Number two, an obstacle is just overvaluation concerns.

You know, when markets are at all time highs, there's often concern that stocks are starting to get overvalued or euphoria might be setting in.

Some valuation metrics that are commonly used are the price to earnings multiple or you'll sometimes hear it just called a P E.

And they'll look at whether this ratio is above or below historical averages.

And right now, when you look at price to earnings multiples, they're a little bit above the historical PEs, especially in certain growth areas of the market like technology and some of the other higher growth areas.

Number three, an obstacle sometimes is just increased volatility.

When markets do get near highs, there tends to be a little bit more volatility.

And any negative news or economic data, which we've seen this year with inflation reports or the Fed saying that they probably won't start lowering rates, things like that, that can trigger these sharp sell-offs as investors kind of rush to protect their gains.

Increased volatility can be obviously a little unsettling, but especially for newer investors, but it's a normal part of investing.

I've talked about this in past episodes that we have about four, five percent drops in the market every single year on average, and one ten percent correction every year on average.

A fourth obstacle is just the FOMO, or Irrational Exuberance.

You know, there's this fear of missing out, and sometimes that can lead to more and more investors rushing in and create this irrational exuberance like we had in 1999 to 2000, March of 2000.

We had it in other periods of time as well.

One of the indicators that I follow pretty closely is margin debt levels.

When I start to see margin debt levels get way above the average levels, that means more and more people are coming into the market, but they're also using borrowed money to buy more stocks or ETFs to kind of leverage their gains.

And that can be a sign that the market is getting close to a top.

Margin debt levels currently aren't anything too drastic to be concerned about, but I tend to look at that indicator as well as a couple other psychological indicators.

A fifth challenge that I tend to see is people getting out of their balanced portfolio and going into growth investments, going into things that have performed exceptionally well and chasing performance.

And this can overweight your portfolio, which can increase your risk.

And that's that greed that kind of sets in where you see things doing so well, you abandon some of your low risk strategies of your portfolio and go all in on a specific sector or an area of the market like large cap growth or mid cap growth.

A seventh kind of challenge is just sector imbalances.

So when markets are reaching new highs, they're usually driven by specific sectors.

What we've seen recently is the markets have been doing pretty well in all areas, but there definitely is an outperformance of certain sectors, especially technology.

And if you chase performance and start overweighing your portfolio in higher valuation tech stocks, then you're setting yourself up when the market does correct, where you could see a potentially bigger drop in your portfolio by overweighing and getting too greedy with your investment strategy.

Now let's just talk about some strategies for investing near market highs.

I've talked about this in past episodes, but the most effective way to take advantage of any ups and downs of the market and not putting all your money in near an all time high is to dollar cost average.

If you have new money to invest, consider investing a portion of it over a period of time.

Whether that's three, six, or nine months.

And you'll take advantage of volatility that way.

If you set up a set dollar amount to go in each month, take your emotions out of it and say on the 15th of every month, I'm going to put $10,000 into a portfolio of ETFs in different areas of the market.

And that way when the market is high, you're buying less shares and when the market is low, you're buying more shares.

Number two, is obviously to maintain a long-term perspective.

You know, investing is a long-term game.

Short-term movements, even significant ones, tend to smooth out over time.

When you're investing, you know, for goals that are 10, 20 or 30 years away, today's market high may seem really insignificant when you look back at it.

Number three, focus on fundamentals if you're going to invest in individual stocks.

Look for companies with strong balance sheets, strong cash flows and sustainable competitive advantages.

And don't buy these high-growth stocks, these momentum stocks just because everyone else is that are trading at really high price-to-earnings multiples or price-to-sales multiples.

Those typically are the ones that go down the most when we do have some type of correction.

Number four, obviously, I've talked about this many times and you've heard it before many, many times, and that's diversification.

Make sure that you, especially when we're near market highs, make sure that you take some things off the table and rebalance your portfolio and make sure you have investments in all the different asset classes, not just everything all in growth.

Have some value investments like small cap value or mid cap value and diversify outside of the United states.

When I look at all the opportunities available to invest in, all the different stocks available, well over half, I think it's close to 70% of the opportunities are outside of the US.

So hire some good money managers with a low cost mutual fund or an ETF to get exposure to international markets, developed markets as well as emerging markets.

And number five, consider some defensive sectors.

If you feel like you're overweighted in high growth, momentum investments or technology, you know, consider investing some of your money in some defensive sectors as well, like utilities, consumer staples and healthcare.

Those sectors tend to perform better during economic slow downs.

Number six is to rebalance your portfolio.

I touched on this briefly, but as markets go up, your asset allocation is going to drift.

If you had a mix of 80-20, and all of a sudden the stock market does really well, your mix could be 85-15 or even 90-10.

So bring that back to your target allocation.

Take some profits.

No one ever lost money taking some profits.

And number seven is keep some powder dry.

If you feel uneasy about the market hitting all-time highs, take some money off the table.

Raise five, 10% cash, and have that available to take advantage of any corrections that might come about.

And number eight is consider some alternative investments.

This is like investments like real estate investment trusts, commodities, or even private equity.

And these can provide some extra diversification and tend to have a lower correlation to stocks and bonds, giving you that extra bit of diversification.

From a behavioral perspective, the biggest risk of investing in market highs is kind of succumbing to emotional decision making.

The fear of missing out may lead you to be overly aggressive with your investments.

But also on the other side of the spectrum, the fear of a crash can lead to you being too cautious and not taking on enough risk.

You know what's best for your particular situation.

And if you work with a financial advisor, they should know what type of risk you're comfortable with that matches your financial goals, your risk tolerance and your time horizon.

Just remember that market highs are a normal part of a healthy growing economy.

The market's made up of people that are bullish and people that are bearish.

And there's always going to be talking heads, people that are overly optimistic or overly pessimistic.

And there's always going to be noise that kind of prevents you from staying invested when times are tough.

The key is to stay invested because your market highs, when you look at three years from now, five years from now, ten years from now, will most likely be significantly higher because you're contributing to your investments and the markets and the economy will continue to grow.

We may have a period where we go sideways, but that's the time to actually up your contributions and continue to invest according to your long-term plan.

So that's it for today's episode, investing near market highs.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

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