By Stephen McBride
Nobody wants to be the schmuck who bought stocks at the tippy-top.
Did you check your 401(k) this week? If so, you surely noticed US stocks hit new all-time highs. And the S&P 500 is now on track for its best year since 1996.
How does this make you feel in your gut? Are you happy stocks are achieving new highs? Or does it scare you… tempt you to sell all your stocks… and run for cover?
Record High Prices Scare Investors
I talk with hundreds of investors… and I can tell you with 100% certainty record high stock prices scare most folks.
A financial advisor told me the other day: “Every client buying stocks right now is terrified. And those already in the market are nervous this is the top.”
I understand the feeling. Owning stocks at all-time highs can feel like standing at the top of a skyscraper and looking over the edge. After all… stock prices are higher than they’ve ever been. That can only mean danger. Right?
What if I told you record highs are nothing to fear?
In fact, they’re cause for celebration.
You see when stocks hit all-time highs, more all-time highs are likely right around the corner. Since 1915 the Dow Jones Industrial Average has made over 1,350 new all-time highs. That works out at roughly 13 new highs a year.
According to 104 years of data, stocks climb an average of 7.8% in the year after they achieve new all-time highs. Even better, five years later, stocks rise another 32%, on average.
And get this… once the market hits a new high, there’s a 90% chance it’ll hit another high within four months! In other words, record highs are rarely a danger sign. Instead, they’re simply stepping stones to more all-time highs.
There’s No Such Thing As a “Sure-Thing” in Investing.
Great investors think in probabilities, not certainties. But a 90% chance of making money is about as close to “certain” as it gets.
Humans are wired to run away from things that “feel” dangerous. Record high stock prices feel dangerous. Our instinct tells us paying a high price for anything is bad.
In most areas of life, this instinct serves you well. It’ll save you from getting taken advantage of by a sleazy salesman… or from buying an overly expensive car… or a giant yacht you don’t need.
But with investing, this instinct works against us.
Over 100-years of data shows there is nothing dangerous about record highs. Since 2013 the S&P 500 has hit 223 new all-time highs.
Imagine you got nervous in 2013… 2014… or 2015… and sold all your stocks. Many folks don’t have to imagine. I know a lot of investors who did exactly that.
They’re still waiting for stocks to “come back down” … and they missed out on doubling their money in one of the greatest booms in history.
Stocks Will Likely Continue to March Higher
With stocks on a roll, you’d think professional investors would be feeling good. Maybe amateurs get hung up on feelings… but surely professionals control their emotions and focus on the cold hard data.
Every couple months, financial magazine Barron’s holds its “Big Money Poll.” In short, it asks professional investors where stocks are headed over the next year.
Again, these are professionals managing hundreds of billions of dollars.
Today, only 27% of money managers think stocks will rise over the next 12-months. Not only is that the lowest reading in over 20 years… It directly contradicts 100 years of data!
Legendary investor Sir John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Said differently, market booms often end when investors get overly optimistic… and they often begin when investors are overly pessimistic. If Templeton’s right, we could very well be closer to the beginning of a big market rally than the end!
It’s Tempting to Think Every New All-Time High Is “the Top.”
But that thought is wrong 99 in 100 times.
Of course, one day, a record high will mark a top. Stocks don’t go up forever. But the chances of this being the top are small.
As the great Fidelity Investments money manager Peter Lynch once said; “More money has been lost by investors trying to anticipate corrections, than has been lost in corrections themselves.”
The bottom line is this: 100-years’ worth of data is screaming at us to buy stocks. The widespread pessimism is telling us it’s a great time to buy stocks, too.
Will you listen to 100 years of data? Or will you listen to your emotions?
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