How to Invest at Stock Market All-Time Highs

Our topic on this episode of the Ready for Retirement podcast is about how to invest when the stock market is at all time highs.

Investing in the market can come with drastic increases and/or decreases in a short amount of time, and it can often take years to recover. It’s important to ensure you have a portfolio that provides stability when stocks take a turn for the worst.

Over the past 10 years there have been extremely negative headlines such as: economic and political outcomes surrounding the U.S. Election, Ebola virus, Dow Jones Industrial Average falling 1,000 points in one day for the first time, COVID-19 pandemic, and the media is constantly telling us not to invest. If you were invested in the past 10 years, despite all of these negative headlines, you would have made around ~ 500%. 

So, how should I invest during all-time highs? 

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• How we should perceive all-time market highs:
  • Three things you can do to protect yourself:
    • Focus on your income needs
      • Short-Term Needs
        • Because we know markets could drop heavily at any time and it can take years to recover, it’s important to ensure you have a portfolio that provides stability when stocks take a turn for the worst.
      • Long-Term Needs
        • You will likely have long-term needs, even if you’re close to retirement. 
        • It’s important to remember that inflation gradually erodes your purchasing power over time and having an overallocation to bonds could be a risk when it comes to achieving your long-term goals.
        • Stocks help meet your income needs as do bonds, it simply depends on whether your income is needed short-term or long-term.
    • Have a Plan 
      • If you don’t need income from your portfolio today and you’re not solely dependent on that income, the stock markets fluctuations aren’t necessarily great, but it’s okay because you have time for that. 
        • Questions to ask yourself:
        • Can I temporarily decrease my expenses? 
          • Temporarily decreasing discretionary expenses may help your investments grow long-term.
        • Can I pick up a part-time job that I enjoy?
        • Does it make sense to collect Social Security sooner?
      • Having a plan ahead of time allows you to be confident so when stocks drop from all-time highs, you don’t have to make a reactionary decision.
        • Getting in front of potential downfalls allows you to have the flexibility to decide what’s best for you when the time comes.
    • Maintain perspective
      • There will be downturns to come and ensuring there is protection that is sufficient to meet your short-term goals allows you to breathe easily when the market is fluctuating because that money is long-term.
      • Dimensional Funds Study
        • This study looked at times when markets were at their highest and how it performed one, three, and five years after all-time highs.
          1. One year after an all-time high, the average annualized return is 14.1%.
          2. Three years after an all-time high, the average return is 10.4%.
          3. Five years after an all-time high, the average return is 9.9%.
        • If you invested in a 60:40 stocks to bonds allocation in your portfolio and stayed invested during these market fluctuations, you came out on the other end on top.
  • Reminders
    • Being in this position is not unique
      • The details are different but we’ve seen this before.
      • Over the past 10 years there have been extremely negative headlines such as U.S. Election outcomes, Ebola virus, Dow Jones Industrial Average falling 1,000 points falling in one day, COVID-19, and the media is telling us not to invest.
        • If you did invest, despite all of these negative headlines, you would have made around ~ 500%.
    • The reason we invest is because the market continues to hit all-time highs
      • Recent volatility doesn’t mean continued volatility- but it feels like it because it’s more recent in our memory.
      • Successful stock market investing is about investing in the right companies, not investing at the right time.
        • Example: I like to take my client’s DOB and inform them where the Dow Jones or S&P 500 was when they were born and the growth that has happened since, which doesn’t even include dividends- this gives clients perspective.

Timestamps

2:30 – Trade war with China, Brexit, and investing long-term

3:10 – Why our current position is not unique

6:12 – How I show clients perspective on long-term investing

8:26 – Do you have enough income for 1, 3, or 5 years?

10:20 – Different types of investments for different goals

12:30 – Social Security

14:20 – Avoid buying at all-time highs

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