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.
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The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through Bedel Financial Consulting, Inc. Advisory services are only offered where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
Dollar cost averaging does not guarantee profits, cannot protect against losses in a declining market, and may result in lower returns compared to investing a lump sum if the market consistently rises; it is a strategy to smooth out price fluctuations over time by investing a fixed amount regularly, but does not eliminate investment risk.
Diversification does not guarantee a profit or protect against losses in a declining market. While it can be an effective strategy for managing risk by spreading investments across various asset classes or sectors, it cannot eliminate the possibility of investment loss entirely.
