Reacting to New Highs in the Markets

Sam Swift

Jun 5, 2014

By: Sam Swift, CFA, CFP®

You may have noticed that the Dow and S&P 500 have closed at record highs lately. Good news, of course, but it also makes it an easy time to be the daily headline writer financial news sites. At the end of the day, you just pick one of these:

  1. S&P 500 slides off of record high
  2. S&P 500 hits another record high

I joke, but that’s the thing about record highs in the market—once you’ve hit one, you’re quite likely to hit many more. In fact, the long history of markets is that they are constantly hitting record highs with the most recent “record low” coming in the early 1930’s (I am reasonably certain that will be the last “record low” we see). The problem comes in projecting the recent and changing your long-term strategy which can come in two forms.

First, some become susceptible to the Emotional Cycle of Investing and want to buy, buy, buy!

June graphic

This was demonstrated with the rush into tech stocks in the late 1990’s and the rush into housing before the most recent crash. The problem with the emotional cycle of investing is that it runs exactly counter to a sound investment plan—buying at market highs and selling at market lows.

The second reaction to record highs is the ultra-contrarian point of view; that is, wanting to get out now (or being very hesitant to buy in now) because “there’s no way this can continue”. This reaction can be equally as destructive as the first one. As I pointed out earlier, the long history of markets is that they are constantly hitting record highs. If you took this viewpoint and divested after a record high of 142.87 in November of 1982, you would have missed a lot of record highs on the way to 333.33 in August of 1987. From March of 1995 when the S&P 500 first cracked 500, it continued to break new milestones several times per year until closing above 1500 in March of 2000. Finally, just one year ago last May, the same “new market high” headlines were popping up as the S&P 500 was clearing 1600 for the first time (it’s approaching the 2000 level as of this post). Should you have sold then?

The common mistake in both reactions is that you are letting market movements dictate your long-term strategy. We know there will be random drops and gains in the market, but we just don’t know when they will happen. We are also near certain that markets will be higher twenty years from now than they are today regardless of what they do in between.

With a proper plan and planner, you can hopefully ignore the emotional pulls of recent headlines and focus on what matters. Changes to your long-term investment strategy should be dictated by your changing goals and resources, not the random movements of the market.

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