The stock market has been breaking records lately, reaching new highs almost every week. This may seem like good news for investors, but it also raises some questions and concerns. Is the market too expensive? Are we due for a correction or a crash? How should we adjust our portfolios in this environment?

In this blog post, I will share some insights from my perspective as a Chief Investment Officer, and explain why market highs are not something to fear, but rather to embrace. I will also provide some practical tips on how to invest wisely and confidently when the market is up.

Why Market Highs Are Normal and Expected

The first thing to understand is that market highs are not rare or unusual events. In fact, they are quite common and predictable. According to historical data, the S&P 500, which has data going back to 1926, has closed at a new high about 30% of the time. This means that almost one out of every three months, the market has reached a new peak.

This is not surprising, given the nature of stocks. Stocks represent ownership claims on companies’ earnings and dividends, which are driven by the continuous efforts of businesses to innovate and create value. As such, stocks have a positive expected return, meaning that they tend to go up over time. Of course, this does not mean that stocks always go up, or that they go up in a straight line. There are periods of volatility, uncertainty, and decline, but these are usually followed by periods of recovery, growth, and expansion.

How Market Highs Affect Future Returns

Another important point to realize is that market highs do not imply lower future returns. Many investors may think that after a strong run-up, the market is bound to fall or stagnate. They may be tempted to sell their stocks and wait for a better entry point. However, this is a risky and ineffective strategy, as it involves trying to time the market, which is notoriously difficult and costly.

The evidence shows that market highs are not reliable indicators of future performance. In fact, they are often followed by higher returns, not lower ones. For example, after reaching a new high, the S&P 500 has averaged a 13.7% return one year later, a 10.6% return over the next three years, and a 10.2% return over the next five years. These figures are very close to the market’s overall average returns across similar time frames, suggesting that market highs do not have a significant impact on future returns.

Moreover, the market has been higher 82% of the time one year after making a new high, indicating that the odds are in favor of staying invested rather than getting out. Therefore, investors should not be afraid of market highs, but rather view them as opportunities to participate in the market’s long-term growth potential.

How to Invest When the Market is High

So, how should investors approach market highs? Here are some practical tips to help you invest wisely and confidently when the market is up:

• Maintain a long-term perspective. The key to successful investing is to focus on your long-term goals and objectives, and not get distracted by short-term fluctuations. Market highs and lows are inevitable, but they are also temporary. What matters is the long-term trend, which is upward for stocks. Therefore, you should stick to your investment plan and avoid making emotional decisions based on fear or greed.
• Diversify your portfolio. One of the best ways to reduce risk and enhance returns is to diversify your portfolio across different asset classes, sectors, regions, and styles. Diversification helps you balance the trade-off between risk and return, and allows you to benefit from various sources of growth and income. By diversifying your portfolio, you can also avoid putting all your eggs in one basket, and protect yourself from the impact of a single market downturn.
• Rebalance your portfolio. Another important practice is to rebalance your portfolio periodically, which means adjusting your asset allocation to match your target weights. Rebalancing helps you maintain your desired risk and return profile, and prevents your portfolio from drifting too far from your original plan. Rebalancing also forces you to buy low and sell high, which is the essence of investing. By rebalancing your portfolio, you can take advantage of market movements and keep your portfolio in line with your goals.
• Invest regularly and consistently. Finally, one of the most effective and simple strategies is to invest regularly and consistently, regardless of market conditions. This can be done by setting up an automatic investment plan, which allows you to invest a fixed amount of money at regular intervals, such as monthly or quarterly. This way, you can take advantage of dollar-cost averaging, which means buying more shares when prices are low and fewer shares when prices are high. By investing regularly and consistently, you can reduce the impact of market volatility and build wealth over time.

Conclusion

In conclusion, market highs are not something to be feared, but rather to be embraced. They are a sign of the market’s growth and resilience, and they do not imply lower future returns. Instead of trying to time the market, investors should follow some simple and proven principles, such as maintaining a long-term perspective, diversifying their portfolio, rebalancing their portfolio, and investing regularly and consistently. By doing so, they can invest wisely and confidently when the market is high, and achieve their financial goals.