What Do New Market Highs Mean For Investors?
When the DOW surpassed 20,000 recently, many people predicted an immediate market correction. Thus far, they’ve been wrong. And while it’s quite attention grabbing to see such a major milestone, the underlying performance of individual stocks and the companies they represent are not cognizant of a public benchmark. Prices tend to rise over time, as they always have. When one considers the long term history of the stock market (all of us are familiar with the historical charts showing stocks moving up over the years), it becomes evident that financial markets are actually hitting new highs on a fairly regular basis.
"Since 1926 and through November 2016, 63% of the time, one month after a new market high is reached, stocks move even higher."
Here’s what we know about the subsequent market performance after stocks reach a new high. Since 1926 and through November 2016, 63% of the time, one month after a new market high is reached, stocks move even higher. While this does mean 37% of the time, the market pulls back, looking out further, stocks are higher 80% of the time just one year later. In five years, they move higher 84% of the time, and after 10 years, stocks have an impressive 92% chance of being higher.
Time is the investor’s friend. Given that any money an investor has invested in stocks should have at least a five to ten year time horizon — the duration of time the money has to work before it is needed — this provides an excellent margin of safety and a high likelihood of further return on investment, even if stock prices recently broke a record.
That said, investors can improve their returns over time, not by trying to predict short-term market moves, but instead by using disciplined rebalancing to "buy low" and "sell high." By periodically evaluating portfolio holdings against strategic targets, successful investors can trim profits in positions that have seen the most growth and buy additional shares of assets that may have recently moved down or experienced less appreciation. Such small and steady moves can help maintain an investor's target risk /return profile, but also enhance aggregate returns over time.
Sources: Data based on cumulative returns of the S&P 500 Index, monthly data: January 1926 - November 2016. Standard & Poor’s Index Services Group.