Investing in bull markets
Subscriber Benefit
As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe Now
Currently, the S&P 500 is approximately 0.5% off its all-time high, while small-cap and international stocks are a bit further back, trailing by 4% and 6%, respectively. Despite being close to all-time highs, it’s crucial to remain invested and focus on risk management to achieve long-term investment success.
Understanding Market Highs
First, it’s critical to understand that markets reaching all-time highs is not an anomaly but a frequent event. In 2024 alone, we’ve witnessed the S&P 500 reach new highs on nearly 60 trading days. In fact, since 1950, the index has hit an all-time high on about 7% of trading days, or roughly once every two weeks. This statistic should reassure investors that high market levels are part of a normal market rhythm rather than a precursor to an immediate downturn.
Since 1926, the S&P 500 has had positive annual returns 73% of the time, with only 27% being negative. The average return during these positive years has been an impressive +21%, whereas the average drop during negative years has been -13%. This disparity highlights an important lesson: while the average annual return might hover around 8-10%, yearly performance varies widely. Therefore, it’s beneficial to remain invested during all market conditions because the likelihood of a positive year is significantly higher than that of a negative one.
Risk Management Strategy for Long-Term Investing
- Stay Invested: Despite the urge to pull out when markets seem “too high,” history suggests that the best action is often no action. Long-term gains are made by staying invested through market cycles and aligning the risks in your portfolio with the timeline of your personal financial goals and cash flow.
- Asset Class & Geographical Diversification: While the S&P 500 is near-record, other asset classes like small-cap and international stocks have not been as strong. Areas that have been lagging could offer significant catch-up growth. Maintaining diversified exposure in your portfolio and rebalancing regularly to keep your allocation to each asset class in line with your long-term target can ensure that you participate in these rebounds if they occur.
- Dollar-Cost Averaging (DCA): DCA is a method that involves investing a fixed amount of money at regular intervals (e.g., monthly purchases). This reduces the psychological burden that many individuals face when investing a large sum all at once. This is also the approach most people take with their 401ks/403bs, as their contributions are automatically invested with each paycheck. While DCA helps manage the fear of timing the market or investing at a peak, remember that since markets generally trend upwards and are positive more often than not, having all your assets invested for as long as possible typically yields better long-term returns. Time in the market, not timing the market, is best for long-term success.
- Emotional Discipline: High market levels can evoke fear, but history shows these are often followed by further gains. Emotional discipline means sticking to your strategy and not reacting to short-term market movements. Patience can be your greatest ally, especially in a retirement strategy where compounding returns over decades can dwarf short-term market fluctuations.
Summary
Investing for retirement when markets are at or near all-time highs can seem intimidating, but these conditions occur much more frequently than many realize. By focusing on diversification and maintaining a disciplined approach to risk management, you can continue to build wealth for your retirement throughout all market scenarios.
Jonathan Koop is a Senior Portfolio Manager at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Jonathan at JKoop@BedelFinancial.com