Lately major stock market indexes have hit dizzying heights. The S&P 500 and Dow Jones Industrial Average both reached several new records recently.
While this is very exciting for investors today, it is actually very sobering. I say that because if you bought a Nasdaq index fund back in 2000, it took 15 long years of holding on to it just to break even and get back to where you started. I know this is a pessimistic way to look at things but I believe this vantage point can help you think differently about investing and protect your capital.
And just to see things in proper context, consider that 15 years may be nothing. It took 25 years for the Nikkei 225 (Japanese market index) to overtake the high it reached in 1989 and it took 27 years for gold prices to surpass the highs they hit back in 1980.
Bottom line? The new highs we’ve reached recently tell us a few things about the market that most investors prefer to ignore:
1. The Market Doesn’t Always Comes Back
Historically the market has come back. But who knows what will happen next time? And even if the market does come back, how long will it take? Some people think that if you hold on to something long enough, the value will be restored. But are you willing to wait 15 years? How about 25 years? What about 27 years? If you are 20 years old, it might be OK. But if you are retired or getting close to retirement, you can’t afford to wait that long.
The market doesn’t care what you paid for your stocks or funds. If you stick with losing investments for years and years, it may cost you a fortune in lost opportunity if the market shines its light elsewhere. In other words, if hold on to investments that are out of favor, you give up the opportunity to participate other alternatives that are in favor. Bad move Benjamin.
2. The Market May Not Buy Your Story
Back in early 2000 investors couldn’t get enough of the tech stocks. Most people thought that technology was going to change the world and they wanted a piece of the action.
Well..technology did change the world and continues to do so at an accelerating pace. But many of the companies that were traded on the exchanges 15 years ago are out of business today.
That’s true even though many of those companies had great stories that made a lot of sense to the people who bought shares. But over time, the market doesn’t really care about stories. The market cares about the numbers. And when companies fail to deliver profits, shares are punished. Investors who cling to their stocks and funds because they believe the stories and ignore the numbers can get painfully burned. Don’t let that happen to you.
Successful investors need to be willing to take moderate losses when the market shifts and redeploy their money into better performing alternatives. This is an important take away friend.
3. You Can’t Predict The Future – Really
If you think back 15 or 20 years ago, did you really expect the world to look like it does today? Probably not. So what makes you think you can foresee what the world is going to look like 15 years from now? It’s unreasonable to expect that from yourself or anyone else.
Rest assured, there will be tremendous opportunities going forward. But neither you nor I can possibly predict what they are. Certainly you can make logical arguments to support your vision of what lays ahead. But the reality is, there are always unforeseen forces that will have far greater impact on what the world will look like. The sad part is, there is no way to know what the end result is going to be until we get there.
What Is An Investor To Do Given So Much Uncertainty?
The long road back for the Nasdaq, Nikkei and Gold illustrate the potential danger you take if you ignore what is happening in the market real time. In my opinion, it’s important to use an investment strategy that measures investment strength and weakness and adjusts portfolios accordingly. Don’t get married to one stock or fund. Be open to what the market is telling you.
It’s great that the market is hitting new highs and rewarding growth investors. But don’t expect today’s darlings to be tomorrow’s favorites too. The most important lesson that the recent highs of the Nasdaq and other indexes lays in front of us is how dangerous it can be to ignore the market and how long it may take to get our money back if we do so.
Want some help managing this crazy market? Let’s talk.
John Poprac says
Your NASDAQ example is a little deceiving. You neglect to mention that the NASDAQ doubled in the 12 months prior to hitting the all time high in 2000. If that is your endpoint, it only took 7 years to recover. And if you take mid 1998 as your arbitrary end point, you broke even by mid year 2004.
Neal Frankle, CFP ® says
John, thanks for your comment. What is deceiving? What is incorrect about the statement?