The last six-months have been a wild ride for the market. The big sell-off in the fourth quarter of 2018 is fading from memory and the S&P 500 has pushed back to all-time highs. For the factors cited for causing the market drop, not much has changed. Trade talks with China continue, Brexit is still in limbo and growth expectations, as predicted, have moderated. Yet, here we are, back at “record highs”
I find it humorous when the news hypes the fact that the market is making “record highs.” Like this is a rare occurrence and a new feat of capitalism. In fact, taking a long view, the market is usually at “record highs”, as the stock market tends to move in an upward trajectory. It’s like saying your age is at record highs. Well, almost. The market does drop and it can take years to get back to previous levels, but thus far, the long-term trend is for the market to ratchet to higher and higher levels. There are many reasons for this, like: inflation, population growth, and fairly efficient allocation of capital.
Traders and hedge funds have short time frames in which to show results. Catching moves (in either directions) is their goal, leading to more aggressive re-positioning of portfolios. Most individual investors have the huge advantage of a long time frame. When you have years or decades to mark your success, sharp pullbacks and rallies can be obscured by the long-term trends.
The fact that the market is making new highs should be cause for neither euphoria or fear. We should put our psychological biases aside and remain committed to our investing plan. Harder said than done. Debates over timing the market is great for dinner parties and validating our worth as investors (or financial advisors), but how does it actually translate in our brokerage statements? It is a worthwhile question to pursue. One thing is true, considering the 17.6% surge in the S&P 500[1], the risk-reward of investing now is less compelling than at the start of the year.
Market momentum works both ways. The market unraveling in December seemed to feed on itself creating an overshoot that was, in hindsight, a great buying opportunity. Similarly, the rebound action may continue to grind the market higher. Rebalancing your portfolio is generally a prudent tactic. Buying when the market drops and lightening as it rises to keep your portfolio anchored to an allocation sometimes helps to take advantage of volatile markets--helping both the portfolio and ego.
[1] http://performance.morningstar.com/funds/etf/total-returns.action?t=IVV®ion=USA&culture=en_US
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