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The Stock Market Hit a Record High. Now What?

Buying low and selling high is harder than it sounds


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The U.S. stock market, as measured by the Standard and Poor’s 500 index, set a new all-time record high last Friday, marking the official start of a new bull market. The S&P 500 benchmark index closed at 4,839.81, eclipsing the 4,796.56 record set just over two years earlier on January 3, 2022.

A bear market is often defined as a decline of 20 percent or more, and the bear market of 2022 is a now a distant but painful memory. Today unemployment is low, inflation is falling, and the talk of recession is fading. I’m seeing that people are more optimistic about the stock market, though I don’t share that optimism. Here is why you shouldn’t get carried away by an all-time high. For one thing, they aren’t that unusual.

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According to Bloomberg, the S&P 500 index has hit 1,176 all-time highs since 1957. I counted 140 all-time highs in the last five years alone. The only thing different about this record high is that it’s the first record high after a bear market.

But markets are mean reverting, which is a fancy way of saying neither good times nor bad last forever. Bull and bear markets are part of the nature of the stock market, and your best strategy is to avoid chasing performance. Figure out how much you want in stocks and stick to it.

It’s not as easy as it sounds. Think back to the news and how you felt back around October 12, 2022. Inflation was running rampant and both stocks and bonds had plunged and recession predictions were numerous. Better yet, go back to March 23, 2020, when COVID changed our lives and stocks had fallen by nearly 35 percent in just 33 days. While nobody knows at the time when stocks have bottomed, the market was on sale during those periods, yet few were buying. The total returns of an S&P 500 index fund bought on those two dates were 38.1 percent and 130.4 percent, respectively.

What should you do?

First, remember that dividends play an important part of your total return from the stock market. On a total return basis — including dividends — the index reached a new high well before Jan. 19. According to S&P, 403 issues in the index — about 80 percent — paid a dividend last year.

More importantly, look at your brokerage statements in March of 2020 and the second half of 2022. Did you sell stocks or stock funds? I’ve found the best predictor of what someone will do in the next bear stock market is what they did in the last one. When someone tells me they won’t make the same mistake of selling after a plunge, I challenge them to not be so sure; performance chasing is a hard habit to break. Though every market plunge may be different, and its cause may have never happened before, the fact is that our response to it remains predictably the same.

Bear markets are painful. We imagine that our future financial independence has evaporated, taking our dreams along with it. The human reaction to pain is to want to make it stop, and selling accomplishes that in the moment.

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On the other hand, buying during a bear market magnifies the pain. I’ve been studying markets and human investing behavior for decades, and I assure you that knowledge did not shield me from the pain when I increased my allocation to stocks back in March of 2020. It was like an extra scoop of anxiety on my bear market sundae.

It turns out that one bit of Wall Street wisdom is quite true: It’s  better to buy when stocks are on sale and sell when stock prices are higher. The simple mathematics and logic may seem obvious yet, in reality, it’s emotionally very difficult to do. I advise people to pick an asset allocation target between stocks and bonds plus cash. My target happens to be 45 percent stocks as I wrote about back in 2015. It’s still my target and I don’t let that range fall outside of 5 percentage points, meaning the stock allocation must not go over 50 percent or below 40 percent. I further advise them that their asset allocation should be based on both their willingness and need to take risk, and then that they should commit to sticking with it using a tolerance of 5 to 6 percentage points.

Even though most of us are feeling better about the stock market at the moment with this new all-time high, it’s probably a good time to do what’s called rebalancing. This means selling some stocks or stock funds to get back to the target asset allocation. And when stocks plunge and the bear is back, it likely means buying more. In the words of Warren Buffett: Attempt to be fearful when others are greedy and to be greedy only when others are fearful.” When it comes to market highs or lows, it turns out that the best investment strategy is simple but hard to do.

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