So is the Dow going to bust past 20,000 or isn’t it? By the time you’re reading this, maybe it already has. Either way, what does the milestone high-water mark mean to you as an investor? We would propose that the answer is: Not a whole lot.
Whenever markets flirt with new highs, you may wonder if it’s some sort of signal that it’s time to cash out, assuming prices aren’t likely to go a whole lot higher. You may even hear pundits in the popular press expressing opinions to that effect.
Instead of guessing, we prefer to look at the evidence. As Dimensional demonstrates in “New Market Highs and Positive Expected Returns,” there is little evidence that new monthly highs signal near-term declines. Consider the S&P 500 Index for the better part of the last century. From 1926–2016, the proportion of annual returns that were positive after a new monthly high was similar to the proportion of annual returns that were positive after any index level. So much for a market high being a dependable “sell” signal.
What does drive expected market returns? Stock prices are set by the combined expectations of all market players, none of whom would keep investing if they didn’t think they could keep making money at it. That’s how efficient markets work, and it’s one reason why investing is best approached as a long-term commitment. Staying invested and not making changes based on short-term “signals” increases your likelihood of success. For additional insights, read Dimensional’s article New Market Highs and Positive Expected Returns.
SAGE Serendipity: When the blog Brain Pickings turned ten last year it’s founder and author Maria Popova wrote a remarkable list: 10 Learnings from 10 Years of Brain Pickings. It’s worth a read – and maybe a print out.
This year, #10 on her list is Don’t just resist cynicism — fight it actively. Here is an excerpt: “There is nothing more difficult yet more gratifying in our society than living with sincerity and acting from a place of largehearted, constructive, rational faith in the human spirit, continually bending toward growth and betterment. This remains the most potent antidote to cynicism.”