The stock market has shrugged off a wave of concerns in recent years and is again hitting new all-time highs. The Dow Jones Industrial Average crossed 40,000 for the first time ever in May, while the S&P 500 is up around 11 percent so far in 2024, following a 26 percent gain in 2023. Certain areas of the market are up even more, such as those tied to the artificial intelligence boom which has sent shares of chip maker Nvidia soaring, up 223 percent over the past year.
This kind of stock market performance can make some investors nervous and even worry about a possible correction or crash. Here’s what financial advisors say you should do with stocks near all-time highs.
Stock market highs happen more often than you think
When the stock market is reaching the highest levels in its history, it’s natural to think it might not be the best time to invest. Afterall, aren’t you supposed to buy low and sell high? But selling investments or failing to buy even when stocks are near highs can cause you to miss out on years of compounding.
“It is actually very common for the market to reach all-time highs,” says Brenna Saunders, a Kansas City-area private wealth manager at Creative Planning. “For our clients, we recommend staying invested in their target allocation.”
The S&P 500 has reached thousands of new all-time highs since 1950, according to data from RBC Global Asset Management. Consistently investing, even at market highs, has proven to be the best approach.
An investor who only bought at all-time highs from 1950 to 2019 wouldn’t have performed much differently from one who bought at all other dates, according to RBC. The average five-year returns when only investing at all-time highs was 10.3 percent, compared to 11.3 percent when investing at all other dates. The one-year and three-year returns saw similar results, RBC found.
“Historically, all-time highs are followed by more all-time highs,” says Will Gholston, vice president of investments at wealth management firm Re-Envision Wealth.
Invest more in stocks or wait? Stay focused on long-term horizon and goals
Even though markets are hitting all-time highs, that doesn’t mean you should abandon your long-term plan, but there could be opportunities to rebalance your portfolio or adjust allocations towards areas that haven’t performed as well.
“We are also taking time to review our client’s allocations and make sure that any drift away from their targets to more stable investments is addressed now that we have more positive momentum in the market,” Saunders said.
Small-cap stocks and international stocks have lagged the performance of larger companies, Saunders said, creating the opportunity for continued gains if market returns broaden.
“In a well-diversified portfolio, that leaves more room for continued improvement as the returns normalize between the various large cap US companies as well as the different asset classes,” she said.
Know your risk tolerance and be prepared for short-term pullbacks
The recent stock market performance is great for portfolios, but it’s important to remember that stocks are volatile and trends can reverse quickly.
“Long-term investors should take this opportunity to reevaluate the risk that they are currently taking in their portfolio and adjust to align with their appetite for the potential volatility of the market,” says Faron Daugs, a wealth advisor and CEO at Harrison Wallace Financial Group in Illinois.
People often understand how they’ll respond to losses better when it’s put in terms of dollars rather than a percentage loss, Daugs says. For example, many people say they’re fine if their $1 million portfolio suffers a 10 percent loss, but a $100,000 loss elicits a different reaction.
Re-Envision’s Gholston says a long-term time horizon is critical if you’re going to invest in stocks at all.
“Generally speaking, we believe that if a client’s investment time horizon for the capital in question isn’t 5 years or greater then he or she shouldn’t be invested in stocks,” he said.
While “cautiously optimistic” on the market outlook over the medium-term, Gholston said valuation presents a potential risk that could lead to volatility.
“More opportunistic investors should be able to take advantage of these short-term pullbacks to build positions,” he said.
Bottom line
The stock market at all-time highs is more normal than you might think and shouldn’t cause you to deviate from your long-term plan. Take the opportunity to assess your portfolio and make sure it aligns with your goals and risk tolerance. Remember that volatility is the price you pay for long-term stock market returns, so preparing for how to take advantage of future downturns can help you from being surprised when they show up, whenever that may be.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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