One of the most fundamental concepts of investing and perhaps in all of finance
is the old saying “Buy low, sell high.” While this may seem like a pretty simple
concept in practice this idea falls flat very fast. Markets are much more complicated
and unintuitive than they are at holiday dinner conversations or history textbooks.
Just in 2021 the S&P 500 hit 100 new all time highs and each one left investors
pondering if it would be the last. Even the term “all-time highs” implies that it
could be a peak, but this is not the case. Since 1950 the S&P 500 has hit 1,387
all-time highs averaging a new high around every 19 days. It seems outrageous that
the S&P 500 could reach a new high every 19 days despite recessions and pullbacks,
but this makes more sense when considering expansion periods such as the beginning of the Pandemic. Just over the course
of the pandemic the S&P reached 151 new highs, in light of the fastest economic recovery
in history, leaving what we thought was the last of the pandemic. So, if all-time
highs are so common does the “golden rule” of investing apply?
In principle, yes. In practice it’s another story. Buying high might not necessarily
be a bad thing when considering what’s driving the price, which in the case of the
S&P usually comes in the form positive economic outlooks, jumps in revenue, or
general optimism. Another thing to consider is that oftentimes these all-time highs
happen within days or weeks of each other and usually occur in times of economic
strength or expansionary periods. Since 1950 on average 88% of highs have another
within 10 days, 82% have another within 5 days, and 69% have another high within
the following trading day. With this in mind it might not be a bad time to invest
the next time an all-time high is reached.
Source: Standard & Poor, Data as August 1st 2022
Disclosures:
Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved. Past performance is not a guarantee of future results.
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The Bureau of Economic & Asset Research at Berkeley does not provide tax, legal or accounting advice. Information presented is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.
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