With markets (again) hitting all-time highs, I thought I would re-post our September 2016 Factors In Focus newsletter, "Managing Market Highs."
Pay particular attention to the table at the bottom of page 1, which I've reproduced below. Most investors assume that new market highs mean a stock decline is soon to follow. Certainly, the financial media stokes these fears with non-stop reports about how stocks are "overpriced." But the evidence finds that stocks tend to produce positive future returns even after reaching all-time highs.
I'll explain the first row of the chart to support my point. Looking at all 12-month periods since 1926, the S&P 500 has had a positive return 75% of the time. That means we've seen stock market gains in 3 out of every 4 years. The average return on the S&P 500 during these positive years was +21.2%. But what if we only look at 12-month periods after the stock market has reached an all-time high? Overwhelmingly, highs beget more highs. After reaching an all-time high, the S&P 500 was positive over the next 12 months 80% of the time (even more often than all 12-month periods)! The average S&P 500 return during these positive periods was +19.8%!
This data, along with other evidence, informs our advice to stick with your investment plan regardless of short-term market movements. At some point, stocks will decline and we'll experience a "correction" (10% decline) or a "bear market" (20%+ decline). But making changes to your portfolio (paring back on or selling out of stocks) because you are assuming that stocks will decline after reaching an all-time high usually costs you a hefty sum. In order to capture stock market returns, you need to be fully invested during every period when stocks appreciate, and the evidence shows overwhelmingly that stocks go up, even in the years following fresh market highs. Said differently, you can afford to absorb the temporary downturns, you just cannot miss the advances.
Incidentally, since October 2016 (almost 9 months ago), the S&P 500 is +15.8%*. As expected, we're still managing market highs.
*returns for the asset classes we use are: +16.0% for US Large Cap, +17.0% for US Large Value, +14.4% for US Small Value, +16.3% for Int'l Value, +15.8% for Int'l Small Value, and -0.1% for Five-Year Global Bonds.
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Past performance is not a guarantee of future results. Mutual fund performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.