Ep # 36: Should I Invest When Markets Are At All-Time Highs?
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Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:26
Hey there, Ben. Welcome back.
Benjamin Haas 00:31
Hello Adam. How are you today?
Adam Werner 00:31
Fantastic. Finally warm out.
Benjamin Haas 00:34
Yes, I'm sweating and it's not because I'm scared to talk about this topic. It is warm in here. We'll take it.
Adam Werner 00:45
Yeah. Let's get in, get out. Nobody gets hurt. Get the air conditioner back around.
Benjamin Haas 00:51
Yeah, these old buildings. It's a fact.
Adam Werner 00:54
Yeah. So topic today is investments.
Benjamin Haas 00:58
Woohoo!
Adam Werner 00:58
And a specific question that I feel we've that we've been fielding a fair amount recently. Stock market hitting all-time highs with seems like with fair regularity so far this year.
Benjamin Haas 01:13
26 times. Did I read that right?
Adam Werner 01:15
Is that what it is?
Benjamin Haas 01:16
26-27 times.
Adam Werner 01:18
Yeah, we've had a little bit of a pullback here in the last couple of weeks but still, we're still within a few percentage points of hitting all-time highs again. And typically, all-time highs beget more all-time highs but the question we've been getting is, for those that are either in cash or starting out with investing, is now still an okay time to invest while things are at all-time high or should I wait?
Benjamin Haas 01:44
Very, very fair question that we have a pretty confident answer to. I'll say again, not the reason I'm sweating. Let's maybe put some context to why we say we have a confident response. We've certainly experienced it and I'll say we typically have a more conservative client base so I think it's very true for our clients but statistics show behavioral finance shows that people are two and a half times more worried about loss than they are about the prospect of gaining. I think that fits right into this, where if you see it's at all-time highs and you're worried about loss more than you are future gain, that you may be thinking to yourself, man, this maybe just isn't a good time and it's also I think it's just how we operate with some recency bias. If I flip a coin 10 times and the last five times were heads and I asked you to call the next one, you might go well, it's been heads a lot, maybe I ought to pick tails. And, again, statistically, that may not be the way that it should work out.
Adam Werner 02:55
Right.
Benjamin Haas 02:55
The series of events may not be completely, it's certainly not predictable but I think it's just how our minds work. So it truly is a fair question.
Adam Werner 03:04
Yeah, absolutely and so there was an article recently published by JP Morgan with a little bit of research to back up why they say and we would agree that as long as you have a long-term outlook, long-term being more than a year or more than two years.
Benjamin Haas 03:23
That's key.
Adam Werner 03:24
Yep. Not short-term, long-term outlook, that if you are looking to start investing, now is almost always the right time and here was the data that they use to back it up. They started with picking that they went back to 1988. Why 1988 because something happened in 1987 where in one day the market was down 22%. They had to exclude that from the sample size but picking any random day going back to 1988, if you if you started investing on that random day, one year later, your return on average was 11.9%. This is using the S&P 500.
Benjamin Haas 04:04
Yeah, that's remarkable.
Adam Werner 04:06
Pick a random day one year later, on average up almost 12%. That's great. Then they used the same kind of idea going back to 1988 and only started investing on days that the market hit an all-time high. Again, the market here being the S&P 500 and your one year return later was 14.3%. So completely debunked.
Benjamin Haas 04:28
It almost doesn't compute. Like, how can that be.
Adam Werner 04:33
Well, that's where what I said earlier, like all-time highs but get more all-time highs. As you're making highs, the market is trending higher and those highs can continually happen in any given year to your point where we are 26 all-time highs this year alone, that can happen. So their argument being extrapolating that out over three-year periods, five-year periods, the data still aligned to the point where if it's a random day or you're picking a time at all-time highs, it should be irrelevant as long as your time horizon is appropriately long-term, as we would almost always invest for people with that long-term outlook, then if you're starting or putting cash to work, now is probably still an okay time.
Benjamin Haas 05:20
Yeah, fine. That's just remarkable to me. So let's also then go back to some of the fundamentals that we would also talk about on that date that data aside, when people talk about the market, right, they're usually talking about the S&P 500. The other reason we would say, hey, don't get too caught up on the all-time high as you're probably going to diversify your investments. That's across not just one market, but many, and many of those others may not be, quote, unquote, at their all-time highs.
Adam Werner 05:52
That's a good point.
Benjamin Haas 05:52
You're going to spread it around enough. You're still not trying to time that one thing. I guess I should take that one step further. If it's a chunk of money, if somebody is now saying, hey, I came into something, can rescind conversations, I sold a property, I inherited some money, hey, you know, it was bonus time at the end of the year, do I put this money to work? It's okay to think in terms of dollar cost averaging. Just dividing that pool of money by some interval of time that you'd be comfortable just putting it in, where you're not trying to time things today at the all-time high but over the course of a couple months, if that makes you feel better. The point is to not just wait for some sort of massive pullback because that's where people get caught.
Adam Werner 06:42
Yeah, the idea behind dollar cost averaging is that to your point, you're spreading out the timing risk over whatever that time period is. And I think to us, it depends on the size of the investment, right, we may split it into two pieces, we may spread it out over three months. You can spread it out however long you want, right? Six months, a year, depending on the dollar amount but the idea there is you're taking equal parts and investing. Let's say it's June 1, you're going to put a third to work and then July 1, you're going to put the second third to work and then August 1, you're going to put that last third. You're just removing your emotions from the timing side of things. This is the plan, we're going to invest on these dates. It's like investing in your 401k.
Benjamin Haas 07:31
Exactly.
Adam Werner 07:32
You don't think of the timing. It's when it comes out. It gets invested and whatever the price is, at that time you're buying it.
Benjamin Haas 07:38
Yeah, and that's not to take away from looking at your dollar cost averaging. We have clients that we know have some cash or they build cash, either through their savings, or it's quarterly, bonus, whatever it is. There certainly are times where we would say, maybe against their emotions. Hey, guess what? Great news, the markets down. I don't know why. I still don't know why the market is the thing that people don't like to buy on sale. Everything else in life, like we look at it that way. If you are in some sort of dollar cost averaging, you have some sort of systematic payment. It is okay on those pullbacks (which happened pretty frequently). The market is choppy and it does move quickly to use that as another impetus to get in. So it's the reverse of what we're talking about. Hey, all-time highs, I don't I don't want to put money in. Well, don't worry if it's at a high, don't worry if it's low. These are all buying opportunities.
Adam Werner 08:36
Yeah and ultimately, I think that may be the key takeaway here. Right? Don't let the timing get in your own way. Yes, things can, you can certainly put a chunk of money to work and the market can go down 5% the next day. That certainly can happen but if you're looking at it, again, going back to the long-term time horizon, you go out a year, two years, 10 years, 20 years - if you're investing for long periods of time, that one day is a little blip on hopefully the graph being sloped upwards and to the right.
Benjamin Haas 09:12
Yeah, and I think we're bringing this to light because if you feel like you have been burned before, either by timing or by some investment, statistics show you are significantly more likely to not want to invest and then by the same token, it's very easy to find a naysayer at any given time. You don't have to be a Google expert. You put in should I invest right now and you're going to get a bunch of articles. Look, if you are looking for reasons not to invest, you're going to find many which is why we're just sharing these statistics, sharing the fundamentals.
Adam Werner 09:46
There was a great quote that LPL actually shared this a few months ago and I actually had to look this this guy up because I never saw the name before but his name was Jesse Livermore and apparently, he was a stock investor. He was born in 1877 so he was an investor in the early 1900s. All right, back when stock trading and he is considered the pioneer of day trading. Not something that we would necessarily condone or you know, kind of say, hey, go trade on a daily basis and try to time the market. But his quote and I'll read it here, it says, “one of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first.” These are the two most expensive eights in the world. The point being, everybody would love to be able to sell exactly at the market peak and then be able to get back in exactly at the bottom and be able to time things perfectly. His point being, that's impossible so focus on everything in the middle. If you are, again, a long-term investor. We've said this before, it's time in the market, not timing the market. Let the factors at play here and especially when it comes to time, time can be your best weapon. Don't twist yourself in knots trying to pick the perfect day to buy.
Benjamin Haas 11:24
Yeah, and get out of your own way. I guess that maybe the simplest way to articulate what we want to get across on this specific topic. You can find reasons not to do it. It's okay to worry but it almost has to be that whole set it and forget it, especially if it's not short-term money. It's the same way we talked about allocating retirement dollars. Like if you have enough of a reserve, you give yourself permission to go through those difficult times. So if it happens to be the day that you invest was the all-time high and then we go through one of those 5% market pullbacks or a 10% correction. As long as you have a long enough time horizon, like again, it will come back up and I want people to kind of remember the last couple times that the market felt rocky. You know, it's easy to talk about the pandemic but it was 2018 with some Federal Reserve surprises and trade tensions with China and policy. Back to 2015 oil. Like there are many different reasons why the market does have those hiccups but in every one of those cases going back these last seven, eight years, they were quick. These moves were quick so you almost do have to give yourself permission to wait it out and not worry about, your point there, that first eight.
Adam Werner 12:41
Yeah, so on that note. I think you kind of alluded to it earlier and now even just talking about all of those points in the last couple of years that that felt significant, but they were quick and things kind of rebound quickly. When it comes to the headline news, which right now feeling like you're investing at all-time highs, it's the media's job to sensationalize and try to get eyeballs. Now I'm thinking back to earlier this year, which doesn't even feel like this happened in 2021 but the whole the meme stock craze. Reddit GameStop. Just the headlines that were being thrown out there to catch eyeballs and it truly now this is quite the opposite of trying to time things or feeling like you don't want to invest because things are at all-time highs. This was quite the opposite. This was people chasing that performance because it was all over the news and it was the fear of missing out not the fear of a crash. It was let me just pile onto this bandwagon.
Benjamin Haas 13:49
Am I missing out on crypto?
Adam Werner 13:51
Are we even allowed to say that?
Benjamin Haas 13:54
Are we missing out on this?
Adam Werner 14:00
That's a compliance thing for everybody listening. We're not allowed to give specific advice. We're not allowed to use certain words.
Benjamin Haas 14:07
No, I know. I know. I'm referencing it was a craze that wasn't the headlines and I mean, I don't know when people are going to watch this podcast this week. It's like really back in the headlines.
Adam Werner 14:16
It's down 25-30% this week.
Benjamin Haas 14:20
We're sensationalizing that.
Adam Werner 14:22
Yeah. So I guess the point there being the opposite feeling and I think a lot of it does have to do with just the access to information now. It's at your fingertips literally and it's the juxtaposition between the fear of missing out on gains versus the other side of like, fear of losing what I've already saved. And I think what we see there sometimes is the disconnect between - I'm now thinking like planning as a whole, stripping out the investments. The fear of a couple percent, volatility in the stock market. Meanwhile, someone's coming to us and they may not have a cash reserve, they may not have insurance set up, they may be focused on all of the things that maybe minor risks and to what we would see would be major risks to their financial life, not just the investment side of things.
Benjamin Haas 15:28
Yeah, so I don't want to butcher this either but this was not too long ago that I saw this one and I think it brings home that point that we're focused on something that doesn't happen even as frequently as we would think. So if you ask the general public, what percentage of the time is the market yearly way down? And this study considered that like worse than 12% for the year versus down a little bit. Negative 11 to zero versus little up or way up. Since 1926 I think it was, I don't remember when this went through. Only 7.5% of the time as the market been by that definition, way down. A little bit down: 19.5%. So we're talking like three fourths of the time the market, year over year is up but we are so focused and so fearful of that negative time, that when you ask people how to respond to that, 50% of people thought the market was down essentially every other year and that's historically not the way it's been.
Adam Werner 16:36
Yeah. So how much of that is just media bias? The negative being easy to sell versus just the behavioral side. What you mentioned earlier, just human nature and then probably not want to lose and maybe it's both.
Benjamin Haas 16:53
It's both and I think that's the problem and that's why I'm not trying to get flippant now. I hope the point for people is just get the heck out of your own way. Like that's why we're here. Let's fundamentally go about it with diversification with dollar cost averaging. I don't want you to be the person that last April or last May when let's just wait to see things settle down and then you got to November and was like, well, let's wait to see what happens with this election. Then you got to January like, wow, game stuff, these things in the market, the fundamentals of the market are you know, going to be upside down. This is an extreme case but you have missed out on essentially 100% rate of return recovery since last March. Let's just take a deep breath, all-time highs, like this is just a point in time that quite frankly, does not matter and your statistics earlier talked about it.
Adam Werner 17:48
Yeah, so I think the last point that I would want to make is and I know we've said this in other podcasts, we believe risk is mostly quantifiable when it comes to investments. We use a tool called Riskalyze that we walk through with clients to help put that into perspective. The ultimate point for us when investing for other people or just giving them the review on what they currently own is trying to set those guardrails of what statistically is quote unquote normal in any given investment that they hold and the crux of it is trying to determine, at what point do you reach a breaking point with your investments where you are seeing that negative draw down to the point where you can't stomach it anymore and now you have to get out. Because our point is, we would never want you to be invested in a way that you got to that point and then a March of 2020 happens and you sell out at some point during March because it just doesn't feel good and now that first decision is made - it's time to get out. But that second decision on when to get back in is ultimately the one that we see screwed up the most because it just hard to now convince yourself to get back in when things are probably still not looking so good.
Benjamin Haas 19:16
Yeah, it is not a no we said this before. Investing is not a coin flip. This is not heads, you win tails you lose or black, red, you know, however you associate gambling and investing. The point is, yeah, quantifiable just because you put it in an all-time high in the market, maybe then went through a downturn, does not mean it's lost forever and it certainly does not mean that it all going away. Like that's not how investing works. Remember, it's a zero-sum game.
Adam Werner 19:48
Yeah, that's absolutely true.
Benjamin Haas 19:51
I liked it. I liked this one. I hope it was really helpful for people that maybe got some money on the sidelines or again, just emotionally they get tied in knots. It's important to just talk through these things. And yeah, we're going to lean on history and data to help prove some points but keep it simple.
Adam Werner 20:09
Yeah, ultimately, it's just resetting the expectation, trying to get out of your own way and being okay that if you finally make the decision to invest that could go down but keep your time horizon long enough. More often than not store history has shown, the market always goes higher, it just may not be in a straight line.
Benjamin Haas 20:32
That's right. Well, it's not going to be in a straight line.
Adam Werner 20:36
Volatility is the price of admission when it comes to the stock market.
Benjamin Haas 20:40
You got it. Thank you.
Adam Werner 20:43
See you next time.
Benjamin Haas 20:46
I'll be here.
Adam Werner 20:47
Great. Me too!
Benjamin Haas 21:08
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant, and financial advisor or tax advisor prior to making any decisions. Thanks for listening!
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