Market Top. Now What?
The Dow Jones, S&P 500 and the Nasdaq all hit new all-time record highs yesterday. The last time this occurred was in 1999. I am thankful and nervous to hear this news because after the stock market peaked in 1999 it corrected in 2000.
With the markets at all-time highs what is an investor to do? After all, if you climbed a mountain and reached the peak your next move is to turn around and descend. Sir Edmund Hillary and Tenzing Norgay spent about 15 minutes atop Mount Everest before they headed for home.[1]
A climber who is descending is rewarded with vistas not afforded to them while ascending. The descent allows the climber to reflect on their climb and focus on the next mountain to conquer. When the next stock market correction arrives use it as an opportunity to identify new companies or sectors to add to your portfolio. A market drop will allow you to buy quality companies at fabulous prices.
As the market crests let’s review previous market tops to see what happened to your investment returns had you purchased stocks at the top of the market cycle.[2]
August 1, 1987. If you purchased stocks at this peak, your average annual return was 9.27%.
January 1, 1994. This market top purchase averaged 9.16% per year.
December 1, 1999. This investment produced an average annual return of 4.67%.
October 1, 2007. A 6.2% average annual return is what you earned after buying at this market top.
February 1, 2015. The purchase of stocks a year and a half ago rewarded you with an average annual return of 8.21%
An average of these averages is 7.5%. A 7.5% average annual return for buying at the “worst” time is impressive. Had you purchased bonds at these same peak levels you generated an average annual return of 5.11%. If you kept your money in cash at these peak levels your return was .25% (point two five percent) per year.
A $100,000 investment earning 7.5% for the next twenty years will be worth $424,785. At 5.11% it will grow to $270,944. A twenty-year investment earning .25% will be worth $105,120.[3]
The urge to turnaround and come down from the stock market mountain is high for most investors. I would encourage you to fight this impulse to dramatically reduce your stock holdings and move to cash. Instead focus on your long term goals and investment plans in order for your financial dreams to come true.
Let the mountains bring peace to the people, And the hills, in righteousness. Psalm 72:3
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com
8/12/16.
[1] http://www.history.com/news/7-things-you-should-know-about-mount-everest, Jesse Greenspan, May 29, 2013, accessed August 12, 2016.
[2] Morningstar Office Hypothetical Tool. The returns are calculated with an ending date of 7/31/2016.
[3] FV calculation for 20 years.