With the S&P 500 Index delivering strong returns over the past several years, some investors can’t help but wonder: When will the rally end? What goes up must come down, right? Financial pundits, podcasters, and cable news media are doing their part to fuel this narrative and add to the anxiety. Some clients have even asked if it is better to get out now while the going is good and wait for the market to return to “normal” levels to get back in. If only investing were that simple and market timing actually worked.
What Goes Up, Can Stay Up
In reality, these milestones occur regularly and are a natural part of the market’s progression. Over the past ten years the market has reached a new “all-time high” more than 300 times — that’s nearly 8% of all market days. 2023 was an outlier as the only year in the last decade without any new records. Part of being a successful investor is realizing that markets rise more often than they fall: the S&P 500 Index has spent about 75% of its history rising. Moreover, new market highs tend to cluster around previous ones, acting as a “floor” that the market tends to remain above.
What Goes Down, Rewards the Patient
Of course, market declines are inevitable. Volatility is a normal part of investing and enduring the occasional downturn is essential for reaping long-term rewards. Since 1980, the S&P 500 Index has seen an average annual decline of over 14% within any given year. Yet, despite these dips, average returns have been over 10% per year over that same period. This underscores a key principle: patience is critical to long-term success.
Even accurate predictions about market valuation can lead to poor timing decisions.
The Myth of Market Timing
Wouldn’t it be great to just skip the bad periods and enjoy only the good ones? Unfortunately, trying to time the market based on the perception of market valuation has been academically proven to be nearly impossible to accomplish on any consistent or reliable basis. And once you exit the market, deciding when to re-enter is often harder than the decision to leave.
Lessons from the Greenspan Era
Consider this example from December 1996: Alan Greenspan, the Federal Reserve Chairman at the time, said in a speech that the market was suffering from “irrational exuberance”. He voiced what many were feeling at the time: the market, which had been on a long bull run, was overvalued and operating more on wild emotion than financial merits. While Greenspan’s assessment may have been correct, the market continued to climb higher over the next three and half years. Even after its subsequent downturn, the market’s lowest point remained above the value at which Greenspan made his declaration. Those who chose to sell at what they believed was the top likely missed out on even further gains, illustrating how even accurate predictions about market valuation can lead to poor timing decisions.
Success hinges on time in the market, not in timing the market.
Disciplined Diversification
Examples like this are why your portfolio is comprised of a range of holdings, not just the current high-flyers of the S&P 500 Index. Including investments in US small companies, international and emerging markets, real estate, and high-quality bonds of varying types provides diversification. While some of your holdings soar, others may lag — but over time those roles will reverse. Ongoing rebalancing captures the gains from outperformers while reinvesting in potential future growth. Though this discipline might produce lower short-term returns compared to any singular high-flying strategy, it also avoids the pitfalls of concentrated risk by spreading it out and delivers more consistent long-term results.
Slow and Steady Wins the Race
The ultimate investment truth? Success hinges on time in the market, not in timing the market. The longer you stick to your allocation, the more likely you are to achieve the return your portfolio was designed for. Discipline and diversification are your best allies to get you through even the most challenging market conditions. Remember that we are here to guide and advise you. Together, we can navigate the complexities of the market for the long run.
