Do Stocks Stumble After All-Time Highs?

Welcome to the Informed Investor. Today's topic is All Time Highs. I'm Mark Gochnour. I'll be joined today by Jake DeKinder. And Jake, this is a topic you and I have a ton of energy around when we start reading headlines and bump up to all time highs. Where is your little soapbox that you get on sometimes? 'cause this would definitely be one of your soap boxes. This would be one outfit right here for us. Completely but no, you're right about this. We read these articles about all time highs and then investors are reading this and saying, "Well, should I be invested? Should I not be invested? Should I stay invested?" And I think people get a little bit riled up when they read those articles. All right, let me read a couple headlines here and then we'll talk about how to make sense of some of these, first one, the stock market has a secret weapon that's powering record highs. The stock market has roared back to record highs. What to do now, all right. Let's start with the secret weapon. What's the secret weapon? I think the secret weapon is some form of probably capitalism. People wanting to do well, companies wanting to do well, figure out how to bring products and services to market. So I don't know if that's really like a secret weapon, but that's probably what they're referring to there. I'd almost think about it, it's a powerful weapon. Meaning I have a desire to make money over time with my investments and the market provides a great mechanism as a way to do that. But bringing it back to all time highs then, I think one of the frustrations we have with a lot of these headlines is it sort of gives you the sense that, okay, we come up to an all time high and that's a frozen ceiling. Like you can't really get above there. So once you get near it, it sort of means though, hey, bad things are gonna happen. You might lose some value in your investments. And I get frustrated with that because I do think a lot of investors read those headlines and probably make some decisions that may not be in their best interest when they try to start timing the market around record highs. Think about the classic line with investing. Buy low, sell high. And what this is doing is sort of flipping it on its head and saying, "Wait, wait, wait. Am I buying high? Is that the right way to do this?" So again, I said a couple episodes ago, I don't fault investors 'cause sometimes there's like this intuition where you're like, "Yeah, that makes sense. Why would I wanna buy an all time high?" But when you actually go and look at the evidence, there's nothing that says hitting an all time high should give you pause about expecting to make money going forward. And by the way, thousands and thousands of all time highs we've hit through time in the stock market. Well, maybe there's a different way to position the idea of an all time high. You know, how about this, for example, let's say I got an investment for you. You're an investor and like, Jake, listen, I got an investment and here's the deal. It's never gonna go higher than where it is today. Are you interested? You'd have to be a great sales person, be like, "I got it for you. You'll never make money," like, "Oh yeah, I'm totally in. I'm totally in on that," right? But that's not the case and what you're getting at there is, is that at all points in time, whether at an all time high or whether we're down in the markets, the stock market's priced for a positive expected... Investors are expecting for it to go up over time, otherwise they would not be invested. Yeah, and you have some data around that. We're gonna look at here in a moment what that looks like when you're at all time highs and when you're perhaps much lower than all time highs. But it would be weird as an investor if you never had all time highs. Because all that is is simply meaning I've had a positive return on my investment. So if I bought something for 100 bucks, then it goes to $105, and then a year later it goes to $110, that's an all time high. That just means I had a positive return again. So we like to highlight some of those headlines there. Just be careful about it when you read about all time highs because we also hear other things. You get a little emotional in headlines, for example, it's the worst sense or it's the best return sense. There's always something that kind of gives you a sense of, "Should I make a change in my plan as an investor?" So let me read a couple other headlines as we get into sort of a different way to think about some of these all time highs. So here's one here, a two-month rally pushed the stock market record highs, but watch out for these risks in July. Exuberant investors ignored turmoil at their own risk, so those headlines sort of bring in though this idea of uncertainty, the risk of investing in stocks. Ask yourself a question as an investor, you know, why do you get a return? What's a fundamental reason we get a return? And we bear uncertainty in some form. You know, this idea that oh, there's risks on the horizon or we need to watch out. That's always there in the market. It's the future. We have no clue what's going to happen in the future. We don't know how markets are gonna react to future events. And that's the uncertainty that you take on. If you don't want that, you can go into an investment like treasury bills, right? I mean there's a reason that they call it the risk-free rate. And that's because you're not really taking on very much uncertainty by going into that. And actually that's perfectly fine. I would not beat an investor up if they said, "Hey, I'm only comfortable being in T-bills." You just have to adjust your expectation of what your wealth may look like over time and what that means for what you're trying to do with retirement and planning and sending kids to college and all of those things, right? I mean, and that's just a trade off that you're welcome to make as an investor When it comes to investing in stocks, you have to have the proper horizon. Meaning, if I am investing and think, "Well, I'm just gonna see how it does in the next year or two." That's way too short of a horizon. There's an article that came out in 2022, you know, and that was a tough year in the market. It was. And I remember this one because, it was a interviewing an investor and she was talking about how concerned she was because the money she had to pay for her daughter's wedding later that year was all in stocks and it took a big hit and she wasn't sure how to pay for the wedding. So you have to have proper time horizons in mind when you think about investing in stocks. Yeah, I mean look, we're not here to say what's the exact perfect horizon for being in the market, but I do think you wanna take much more of an intermediate to long term perspective when you're going into the stock market. You wanna be thinking in of 5, 10, 15, 20, 25 years. And in that example there, right? I mean if you have spending needs that are coming up here in the next three months, the next six months, the next year you gotta pay for a kid's college or saving up for a house. It's a wedding, whatever it may be, right? You gotta be careful saying, "Well, that money's over there in the stock market." 'cause as we know over, you know, a three-month, six-month period, you can get some major drop. I mean, again, go back to a couple of months ago and look at what took place back in April, right? I mean in two days we're down. I mean that Thursday, Friday was crazy. And then it comes back the next week and this is all the talk around tariffs. But that gets into the planning discussion and to your point, when you're going towards the stock market, you want to extend out that time horizon and be thinking in terms of long terms, 'cause you actually can get some decent runs where you get multiple years where you have negative returns in the market. I mean, we can show 10-year plus periods where stocks are negative, right? And you have to be prepared for that and that again is that uncertainty we're talking about. But over long periods of time, decades and decades, it goes back to again the idea of record highs. We have hit, I don't know how many thousands of record highs over time, but you can continue to see that value increase and increase over long periods of time. It's just a return on investment. You don't even need to put numbers to it. You know, if you look at just the classic growth of wealth chart, and again, we've got, you know, 99 years coming up on 100 years of data as we always talk about, it tends to go up and to the right. I mean if you just look at that long-term visual. Now if you zoom in on any part, sure you're gonna see volatility. I mean we just referenced April, right? I mean big swings up and down, but as you zoom out and you have that longer term perspective, man, that growth of wealth up and to the right and that's what we're talking about there of sticking it out through the all time highs, through the uncertainty, through all the things that you're reading. And that's how you capture the long term return. You do have some numbers at all time highs, you have some numbers maybe at some tough time periods too. And numbers, I mean, once we get to that spot, what did the market do in future subsequent one, three, and five-year returns? So give us some of those numbers. It helps kind of put in perspective how to think about these periods at all highs. If you look at US stocks 99 years and you say, "What I'm gonna do is every time I hit an all time high, I'm gonna look out one year, three year, and five years on average, how do I do?" And one year out, it's 13.7%. Three years out annualized, it's 10.6, and five years annualized, it's 10.3%. I mean, really, you know, good- I think that surprises a lot of investors probably, yeah. That surprises a lot of people. Now if you go to the other side of the coin, and this is interesting too, if you say, "Well now I wanna look at every time I'm down 10% or more in the markets, how do I do one, three, and five years out?" One year out, you're at 11.7%. Three years out, you're at 10.3% annualized and five years out, you're at 9.6% annualized and, you know, again, if you look at the long term return of US stock markets, it hovers right around 10%. I think it's 10.4 exactly. But you know, whether I'm looking at that all time high of 10.2 or I'm looking, I'm down 10% or more, 9.6, all of those kind of start to look like the long-term return of markets. And by the way, if you sort of play that game and say, "Hey, let's go out longer," it all kind of starts to gravitate right towards that long-term return. When again, I think it's surprising for investors, they probably expected much lower returns at highs and much higher returns down lows. But to me, it highlights sort of this pricing mechanism in the stock market, which is, hey, every single day, really at any point throughout the day, that stock has a positive expected return into the future. And you know, at Dimension, we use the word expected return all the time because you just don't know into the future, but on an expectation, there's a positive return, otherwise nobody would be buying that particular stock. But let's go back to the one of the first headlines we read, which was what to do now. So it kind of gets into the idea then of what do you do? You execute the plan. Right now, if you don't have a plan in place, you know, get with a financial professional, make sure you get something that's sort of tailored, customized to what your needs are and what your goals are when it comes to your money. But talk to a little bit about how to think about that plan and have sort of those expectations in place. You and I discuss this all the time, I mean, it's like the classic fire drill principle, right? I mean, you don't go through the fire drill when the house is on fire, right? You go through it ahead of time so that when something does happen, you're prepared and you execute the plan. You know, when you get on a cruise ship, they don't show you where the lifeboats are when the boat's going down. They do all the pre-checks and they show you everything and they get you prepared so that if something happens, you jump into action and you execute the plan. And I think you want to have that mindset with markets too, which is when big drops come, when volatility comes, when maybe when I get a little bit emotional because I'm experiencing something, I'm reading something, I'm going through something. Rather than letting that take over, you want to jump into action and you want to execute the plan. And I think for a lot of people, it's sticking with the allocation, sticking with the plan you put in place because again, markets will drop. But what we've seen over time is, is that markets do tend to come back and they also reward the people that executed their plan. Yeah, and execute the plan with, I'll say a calmness to it, that's why you do the drill. That just jumped out to me as you were describing that, of it's not just knowing what to do, but you're doing it in a calm manner, which means, in this case, sticking to your plan, staying disciplined in the market, right? And not getting emotional and making a change. You talked about working with a financial professor. I mean, think about that. Think if you are emotionally ready to execute the plan and you're willing to go through those actions and then you put yourself in partnership with... You get together with a financial professional and now you've got this trusted person who's kind of helping guide you through it as well. Now we're talking about a good recipe for success. Okay, I'm gonna summarize a couple things here. We think about all time highs and then you just add anything to it. I think first of all is there's been thousands of all time highs. There could be thousands into the future. It's just a positive or expected return on your investment over time. Be careful when you read some of the headlines. They are designed to get a little bit emotions going. It's not just record highs, it's also, hey, the worst and the best sense and things like that. So what do you do when you bounce around all time highs? Just stick to your plan because the research shows there's positive returns into the future on average over time. So stick to your plan and try to execute it best you can in a calm as little emotional aspect as you can. I think that's perfect. I mean, the only thing I would add is don't take the investment opportunity from Mark. That's not going to make any money over time. Yeah. Don't try to sell me on that one. Somebody says, "Hey, you'll never go higher. Stay away from that one." Alright, last thing here, Jake. You talked about kinda markets gonna have some pretty big swings up, big swings down. You highlighted a couple of those examples a couple months ago. That's gonna be a future topic here on Informed Investor. We are going to get into kind of volatility and how to think about volatility in the stock market on a future episode. Thanks for joining us today and have a fantastic rest of the day.