This accords well with attempting to “sell high”, and we can see that some of our clients are clearly “banking gains”, “selling at the top”, and “reducing risk”. The problem is that all of these phrases are backwards-looking, and investment decisions should be made on a forward-looking basis.
So should you sell when the market hits a record high? Do “high” prices (that is, days when the S&P500 was higher than it had ever been prior to that point) predicts poor subsequent performance? Be aware that by considering this, you’re trying to time the market, and attempting market timing is why most individual investors under-perform a simple buy-and-hold strategy.
So before you start “banking gains”, consider the following points:
- High index prices are always reported in nominal terms, not inflation adjusted. If you look at inflation-adjusted prices, we’re not at a high. Check out this Planet Money episode: The Dow Isn’t Really At A Record High (And It Wouldn’t Matter If It Were) : NPR
- Regardless of the subsequent price returns, you’re missing out on the dividends during that period. Dividends tends to run at about 2% for US equities, higher for international developed equities.
- Finally, let’s test the implied idea that “record high prices predict bad subsequent returns”. Using daily S&P500 data since 1954, we can tag days as “record highs” and “every other day”. There are 1,069 “record high” days, and 14,842 “others” since 1954. We can now compare subsequent 1 year returns of record highs versus regular days. The graph below summarizes the distribution of returns for “record highs” and “others”. There is no systematic pattern for record highs to precede bad years – the median return is almost exactly the same.
Redesigning How You Manage Your Finances at Betterment
Our new design represents a synthesis of a large body of customer feedback. We hope it meets your expectations.
How’d the Market Do? That’s Harder To Answer Than You Think
In taxable investing, your after-tax return—the amount you “take home”—is what’s important. Yet far too many investors focus on market performance. Let’s look at the difference.
Why the Turbulence in the Stock Market?
Nobody has all the answers to why the market takes a nosedive, but it’s often useful to take a look at the economic precursors that may play a role in early-2018 market turbulence.
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