The stock market indices have reached record highs recently and I just have a feeling it’s time to sell. Well, a little more than a feeling. I’ve seen some reports that it’s time to short equities (from an investing legend, mind you) and I have my own personal indicators I look at as well. I mean, stocks have gone up so much, I think I should capture those new gains because odds are they’re going to go down soon.
A study by Dimensional Fund Advisors (DFA) is a good basis for elaboration. It looked at monthly observations of the S&P 500 going back to 1926. From January 1926 through June 2016, 314 of 1,086 months, or 29%, saw new closing highs.
The DFA researchers then projected out for the next year after these new closing highs and found that 80.4% of the time, the index was higher a year later, by 19.8% on average.
What will happen this year? Nothing is certain, but historically, the odds have favored positive performance periods after new highs. I hear people say they play blackjack because it has the best odds of winning, about 42%. Ironically, many of these very same people will turn around and say they’ll sit down for a 42% success rate (blackjack), but not an 80.4% success rate.
Herein lies one of the glaring faults of investor behavior that a good financial advisor can help correct through education and behavior management; making wrong decisions despite or not knowing the evidence. The right advice can be worth a lot of money in the long run.
There are many times you may feel inclined to make changes because of market highs and lows but don’t confuse activity with progress. As it turns out, taking action based on feelings or perceived logic can actually hinder your progress.
P.S.: The percentage of cases where the index was higher one year out after any previous level (not just new highs) is 74%. This just highlights the need for perspective and the difficulty in forecasting tactical shifts related to the markets at any level.
Please contact me here morgan.smith@wpwm if you would like to see the full study or schedule a time to talk with me here: http://tinyurl.com/ScheduleMorgan
January 1990-Present: S&P 500 Total Return Index, Standard & Poor’s Index Services Group;
January 1926-December 1989: S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation YearbookTM, Ibbotson Associates, Chicago
For illustrative purposes only. Index is not available for direct investment. Past performance is no guarantee of future results.
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