Many people say they aren’t comfortable buying when the market indexes are near historic highs. Others point out that new highs tend to be followed by even higher levels. This article examines both sides of the issue. It points out that momentum causes new highs to be followed by more new highs, as has happened the last few years. But it also points out that sometimes record highs are followed by sharp losses, and the indexes don’t set new record highs for a long time. Bottom line: Don’t invest based on conventional wisdom or slogans. Follow the factors that matter to the markets and have a margin of safety in your portfolio.
While volatility clustering makes an imminent “crash” less likely, the environment can change quite rapidly, as we saw in 1929 and 1987. As Nassim Taleb has said, “don’t confuse a lack of volatility with stability, ever.” An all-time high is not without risk.
But the fact remains: stocks tend to go up on average, and as such new all-time highs tend to be followed by more all-time highs. That is as true today as it was on September 3, 1929, January 11, 1973, January 14, 2000, and October 9, 2007. Unfortunately, no one rang a bell at these all-time high tops, alerting you that there would be no new highs for years to come.