The stock market has shaken off a wave of concerns in recent years and is once again reaching new all-time highs. The S&P 500 is up about 10 percent so far in 2024, following a 26 percent gain in 2023. Certain parts of the market have risen even more, such as those tied to the artificial intelligence boom, which the shares of chip manufacturer Nvidia have risen enormously. increased by 215 percent in the past year.
This kind of stock market performance can make some investors nervous and even worried about a possible correction or crash. Here’s what financial advisors say you should do with stocks near their all-time highs.
Stock market highs are more common than you think
When the stock market reaches the highest levels in its history, it is normal to think that this may not be the best time to invest. After all, shouldn’t you buy low and sell high? But if you sell or fail to buy investments, even when stocks are near their all-time highs, you could miss out on returns for years.
“It’s actually very common for the market to reach all-time highs,” said Brenna Saunders, a private wealth manager in Kansas City with Creative Planning. “We recommend that our clients remain invested in their target allocation.”
The S&P 500 has hit thousands of new all-time highs since 1950, according to data from RBC Global Asset Management. Investing consistently, even at market highs, has proven to be the best approach.
An investor who bought only at record highs between 1950 and 2019 would not have performed much differently than someone who bought on all other dates, according to RBC. The average five-year return when investing at record levels was 10.3 percent, compared to 11.3 percent when investing at all other dates. One-year and three-year returns showed similar results, RBC found.
“Historically, record highs are followed by even more record highs,” said Will Gholston, vice president of investments at wealth management firm Re-Envision Wealth.
Stick to your long-term plan
Even though the markets are hitting all-time highs, that doesn’t mean you should abandon your long-term plan. However, opportunities may arise to rebalance your portfolio or adjust allocations to areas that have not performed so well.
“We are also taking the time to review our clients’ allocations and ensure that any deviation from their objectives towards more stable investments is addressed as we have more positive momentum in the market,” Saunders said.
Small-cap stocks and international stocks have lagged the performance of larger companies, according to Saunders, creating the opportunity for continued gains as market returns widen.
“In a well-diversified portfolio, that leaves more room for further improvement as returns normalize across the different major US companies and asset classes,” she said.
Know your risk tolerance and be prepared for pullbacks
Recent stock market performance is great for portfolios, but it’s important to remember that stocks are volatile and trends can reverse quickly.
“Long-term investors should take this opportunity to reevaluate the risk they are currently taking on in their portfolio and adjust to their appetite for the potential volatility of the market,” said Faron Daugs, wealth advisor and CEO at Harrison Wallace Financial. Group in Illinois.
People often better understand how they will respond to losses if they are expressed in dollars, rather than percentage losses, Daugs says. For example, many people say it’s no big deal if their $1 million portfolio suffers a 10 percent loss, but a $100,000 loss evokes a different response.
Re-Envision’s Gholston says a long-term horizon is crucial if you’re going to invest in stocks at all.
“In general, we believe that if a client’s investment horizon for the capital in question is not five years or more, he or she should not invest in equities,” he said.
While he is “cautiously optimistic” about the market’s medium-term prospects, Gholston said the valuation carries potential risk that could lead to volatility.
“More opportunistic investors should be able to take advantage of this short-term pullback to build positions,” he said.
In short
The stock market at record levels is more normal than you might think and shouldn’t cause you to deviate from your long-term plan. Take the opportunity to review your portfolio and make sure it fits your goals and risk tolerance. Keep in mind that volatility is the price you pay for long-term stock market returns. So preparing for how to benefit from future downturns can help you avoid being caught by surprise when they happen, whenever that may be.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
