Market experts have been calling for the current bull run in the stock market to come to a screeching halt annually for 4 years now. Yet the market continues trending higher. And as it does so, more and more investors are getting nervous about investing at market highs.
Many feel that any day now, the market will begin to correct, looking at past price to earnings ratios showing that this market is overvalued based on historical norms.
So the question becomes, should you keep investing at market highs today knowing there is a possibility of a major pullback? You may be surprised at my answer, but it is yes, you should keep investing.
3 Tips For Investing at Market Highs
Below you will find 3 tips to help you navigate today’s investing climate.
#1. Don’t Be Scared
The first tip for investing at market highs is to not be scared. Will a pullback in the market come? Most definitely. But the key thing to remember is that you have no idea when it will come. I don’t know. The experts don’t know. No one knows.
It could happen tomorrow or not until next year or the year after that. I am still investing in this market for two reasons. First, corporate earnings are coming in well. Companies are growing and making money. When this is happening, the economy is growing and the market should continue to rise.
I understand that based on historical price to earnings, the market is overvalued. But it is justified as long as companies continue to grow and increase profits.
#2. Today’s High Is Tomorrow’s Low
The second reason I am still investing in this market is because today’s high is tomorrow’s low. What I mean by this is that the Dow Jones at 26,000 seems high. We’ve never been here before. But the long term trend of the stock market is to go higher. So in 5 years, odds are 26,000 will be low.
Who knows where the Dow Jones will be at. Maybe 28,000. Maybe even higher. The truth is, when the market rises on a regular basis, you are going to get many days or weeks where it regularly hits all time highs. This isn’t necessarily a bad thing.
#3. Keep Things In Perspective
The stock market consistently hitting new highs is a red flag when there isn’t data to back it up. Think back to the dot com bubble. Prices were out of control. The business models of IPO’s didn’t even show how the company was going to be making any money. And when you looked at company earnings, it didn’t make sense that the market kept rising.
It got to a point where investors became irrational and eventually the bottom fell out. The same idea would work today if corporate earnings weren’t coming in as good as they are.
This run in the market could be attributed to the hopes of tax reform. But the rally isn’t based on those hopes. It’s based on investors seeing companies reporting good earnings and wanting to own a piece of those companies.
How To Stay Calm
You’ve just seen why this market rally most likely won’t be coming to an end anytime soon. But when we are talking about money, it doesn’t matter how rational the argument is, emotions are still involved.
So what should you do? Your best option is to keep investing at market highs. But if it makes you feel better, keep some money in cash. Move it to a dedicated savings account that you will invest in the market when it does pull back.
If you do go this route, don’t make the mistake of putting too much money in cash. Just keep 5% or 10% in liquid cash. Any more and you are losing out to inflation and earning a higher return that the stock market provides.
When this pullback will be, I can’t tell you, but for many people doing this will help to ease some fears. To calm yourself further, refer back to your investment plan. Remind yourself of your long term goals and why you are investing in the manner in which you are.
Ask yourself has anything fundamentally changed with the investments you own? Or are you just scared because your emotions are fighting your reasoning? If it is purely emotional, then you need to turn off the television and ignore the market news. For if you are a long term investor who has a 10 year or longer time horizon, everything will be OK in the long run.
Investing at market highs can be tough emotionally. You question buying in at high prices and overlook the fact that the high today is most likely a low point in the future. Work to keep things in perspective. Write down your fears and concerns in your investment plan and document how things turn out.
This will only help you in the future when the stock market is hitting fresh highs and you get worried again. Remember, there are random days when the market jumps that makes up most of your gains. If you miss these days, your return is shot. Stay invested for the long term and everything will work out well in the end.
What does your investment plan look like?
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