New Market Highs…What to Do?

by | Sep 1, 2021 | Investing

The S&P 500 has been on an upward course since it bottomed in March of last year, setting new highs pretty continually since last August.  We know that the market has ups and downs, so it may be natural to feel that the market is bound to fall after a string of strong performance.  People wonder, “should I be doing something different now with the market at all-time highs?”

But there are a number of reasons NOT to take any action.

First, timing market tops and bottoms is a difficult, if not impossible, challenge.  Not only do you have to decide when to get out of the market, but then you need to choose when to get back in, whether you were right or wrong about getting out in the first place. If you are wrong, and people usually are, you run the risk of missing out on further advances.  What would that look like?

As you can see in this chart, if you had missed just the top 5 best days in the 30 years through the end of 2020, your annualized return would have been reduced from 10.23% achieved by the S&P 500 to 8.60%.  Translated into dollar terms, a $1,000 investment in the index would have grown to $20,451 over the 30 years; you would have only $12,917.

Another way to think about the market hitting new highs is to look at what longer-term market performance has been historically after reaching these heights.

Since 1926, the average annualized return for the next year after a new market high has been 13.9%, the next 3-years 10.5% and the next 5 years 9.9%.  So that doesn’t seem to be something to be concerned about from an historical perspective.

Remember, your investment strategy is based on a long-term approach.  When we talk about expected returns for a portfolio, that takes into account market ups and downs. To achieve long-term market returns, you have to be in the market.

Team  Hewins,  LLC  (“Team  Hewins”)  is an SEC-registered investment adviser;  however,  such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.