Frequently, when I speak with a person sitting out of the market with lots of cash, they express concern about investing when the market is at or near new highs.
That’s a valid point. Who wants to invest and then see the market slump?
Of course, there’s are also some obvious problems with that “Waiting for Godot” strategy.
First, no one knows when the market is poised for a fall. Many a market guru has called for a pullback, and then waited, and waited, and waited. Eventually, of course, the market will decline, but then it starts a new upward trajectory. (As evidence, witness BusinessWeek’s famous August 13, 1979 cover story entitled “The Death of Equities.” Since then equities have shown surprising signs of life, generating returns of over 4800% to date, with dividends reinvested.)
Second, sitting on the sidelines in cash and earning just over 0% won’t get you where you want to go. To use one of my favorite examples, let’s say you want to get from Miami to Los Angeles. You’re in your car, all packed up and ready to go. But then you start second guessing the trip. “Oh no,” you say, “What if I get stuck in traffic along the way?”
Well, you might. Or you might not. (You probably will at some point. It’s a long trip). But sitting in your car in Miami for days, months or years won’t get you to Los Angeles, which is where you want and need to go. (And when it comes to investing for retirement, you really need to get there). Traffic is a problem, but sitting in the parking lot forever is not an acceptable solution.
Third, who’s to say that the new highs aren’t just steps along the way to even higher highs? Selling whenever there’s a new high will keep you stuck in that same parking lot forever, says Joshua Brown, author, investment adviser, and CNBC pundit, also known as the Reformed Broker.
“Starting 65 years ago, you’ve had a new high over 1,100 times. That’s about one of every 15 days the market has been open.”
So what if the stock market is at a new high, says Brown. “If a new high is your reason for hitting the buy or sell button, … you are making a mistake.”