As the US stock markets exceed all-time high prices, should investors continue to put money to invest at these prices or wait until prices decline? As with all investing decisions there cannot be a general definitive answer, but a study of the history of prices suggests that the answer may be counter-intuitive.
In the latest edition of his classic Stocks for the Long Run, Professor Jeremy Siegel notes that the share price of stocks reported relates to accumulated capital and does not take into account dividend income. However, the current trend is to pay less to shareholders in the form of dividends and to buy back more shares, affecting the accumulation price of shares.
During a 100 year-period, US publicly traded shares rise 78% of the time. How does the investor avoid with any certainty the 22% of the time when prices will fall? Looking at it another way, we know that in the last 20 years, 42% of the best days of the S&P 500 Index occurred during a bear market (declining stock prices). We also know that 36% of the best days were during the first two months of a bull market (rising prices) before it was clear that a bull market had begun.
We can see from this data that a rising share price is not in itself a reason not to invest. The average bull market since 1950 has lasted 5.5 years. The longest lasted 12 years, ending in 2000, giving a return of 582%. If we expect to be investing for 50 years, we can expect to experience fourteen bear markets. The worst period in the US stock market was the decade from 2000 to 2009, often called the lost decade. To experience investment success, we should be prepared to hold stocks for the long term – and by that, I mean seven to eleven years minimum. Because no one can time price movement, we should always be in the market.
We should manage market risk by being sensibly diversified across key asset classes and economies. It is not sensible to dump a large amount of capital in the market when prices are high but rather invest small sums into the market gradually over time, taking advantage of unpredictable price declines as well as of rising prices.
Bull markets beget bear markets, which beget bull markets. Declining share prices do not necessarily indicate a weak economy, any more than rising share prices necessarily indicate a strong economy. An investor with a sensible investment time horizon and well thought out and diversified investment strategy need not fear high share prices. Stock prices move in cycles. The outperformance that rewarded investors in a twelve-year bull market in the US was followed by a decade of negative returns until 2009. Investors who were sensibly diversified received a return comfortably above inflation.
In a bull market, today’s all-time high price is left behind by tomorrow’s higher price — until it isn’t. Many investors still think they can predict when the trend of prices will change. They are nearly always wrong.
Jeremy Blatch TEP