The Stock Market Hit a Record High. Now What?

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.

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.