What Should You Do When the Market Hits Record Highs?

As I write, the stock market is soaring, again, to all-time highs.  Inevitably, I get the questions from clients, friends, and family “Keith, will the market continue to go higher?  This market has to correct soon, right? What should I do with my investments?”  My answers to which are “I don’t know.  Not necessarily.  And, it depends.” which often leads to some confused looks.  Let me explain…

I believe that timing the stock market with any consistency is incredibly hard – maybe next to impossible. While the market is now at all-time highs, and has moved there fairly quickly, there is nothing that says the market must correct within a given time frame.  Are stocks considered expensive at these levels?  I believe they are.  However, the market can remain expensive for a long period of time.  Remember that stocks were considered expensive back in 1996 yet continued to rally up until March of 2000.  It is important to remember the words of famed economist and investor, Lord John Meynard Keynes “The market can remain irrational longer than you can remain solvent.”

It is also important to note that companies are growing earnings at an increasingly faster rate.  With economic data coming in positively and business-friendly tax-reform becoming more likely analysts expect that trend to continue.  This higher growth would offset the relatively high valuation of the market.  So I can easily see a scenario where the market continues to move higher from here.

On the other hand, there are a lot of reasons to be nervous as well.  We have geo-political tensions rising in the Middle East, a mad dictator in North Korea, and an expensive stock market which has been rising with historically low levels of volatility.  If a big, negative surprise hits the market, I could see investors fleeing back into safer asset classes.

So what should an investor do at this point?  When markets make all-time highs, it is a good time for investors to carefully assess their personal financial situation.  How does your risk/return profile line up with your financial goals?  For many people, this will mean taking some profits and rebalancing back to a target level of risk.  For others, their situations may have changed where they should think about taking more risk.

In other words, we don’t gamble on what we think will happen in the future.  That’s guessing.  What investors should do is ask, ‘what is the worst that could happen?’ and make sure that their financial goals are still secure even if that comes to pass.  That’s being an intelligent investor.

If you have any questions, please reach out to myself or your relationship manager at Stillman Bank.

I look forward to serving your investment and trust needs.

Keith J. Akre, CFA, CFP® – Trust Officer

Investments available through Stillman Trust & Asset Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.