Cashing in your chips might be the worst decision you can make.
Congratulations, long-term investors!
If you’ve been hanging on to your investments over the past eight-plus years since the market bottomed out, you’re probably sitting on some handsome returns. Through Wednesday, Oct. 4,2017, the S&P 500 (SNPINDEX: ^GSPC), Dow Jones Industrial Average (DJINDICES: ^DJI), and Nasdaq Composite (NASDAQINDEX: ^IXIC) were higher by a respective 275%, 246%, and 415% since their March, 9,2009 lows.
Even more impressive, all three indexes are logging fresh all-time record closing highs. That marks more than 40 new all-time highs this year for the Dow, and in excess of 50 new record closing highs for the tech-heavy Nasdaq Composite.
As you might imagine, while the march higher in the S&P 500, Dow, and Nasdaq has many investors cheering, it’s also created quite the group of skeptics who believe the stock market could be teetering at the edge of a cliff. A number of concerns, such as a possible conflict with North Korea, rising interest rates, and Congress’s inability to thus far pass any meaningful reforms, could send the market screaming from its highs. Historically, there have also been 35 stock market corrections in the S&P 500 of 10% or more, when rounded to the nearest whole number, since 1950. The cries for a correction or bear market seem to be getting stronger by the day.
So, what should you do with your money and investments with the stock market at an all-time high? Here are five suggestions.
To be perfectly clear, you don’t need to wait for the stock market to hit an all-time high to reassess the investments in your portfolio, but if you haven’t done it in a while, a record-closing high isn’t a bad time to consider doing so.
When assessing whether it’d be smart to sell a stock, or group of stocks, focus less on share price, your total gain/loss, and even to some extent traditional valuation metrics, and instead reassess the broader investment thesis. Ask yourself what comparative advantages and products or services made you buy that stock in the first place, and then examine if that same thesis holds true today. If the answer is that it does, then there’s really no need to consider selling a stock in question. It’s only worth jettisoning a stock if the investment thesis has changed and no longer holds water.
Worried about a stock market correction? There’s a simple solution: Add dividend-paying stocks to your portfolio.
Dividend stocks come with a number of key advantages, but here are four most prominent. First, dividends act like a beacon for income-seeking investors looking for time-tested business models. In other words, a company isn’t going to pay a regular dividend if its management team doesn’t expect profits to continue.
Second, dividends can be used to hedge against inevitable stock market corrections. Though it’s highly unlikely that the income you receive from a dividend stock is going to erase the paper losses from a move lower in the stock market, it can certainly ease your short-term pain and help calm jittery nerves.
Third, dividends can be reinvested back into more shares of dividend-paying stock. With a dividend reinvestment plan, or Drip, investors can grow both the shares of stock they own and the income they receive in a compounding manner over time. The top money managers commonly use Drips to increase wealth for their clients over the long run.
As icing on the cake, dividend stocks have historically handily outperform non-dividend-paying companies.
Last year, Bank of America /Merrill Lynch released its findings from a study that examined the performance of growth stocks versus value stocks over the past 90 years (1926-2016). The analysis showed that value stocks have generated an average annual return of 17%, compared with growth stocks with an average annual return of 12.6%.
However, this trend has reversed since the end of the Great Recession as a result of the Federal Reserve’s pushing interest rates to well below their long-term average. In an environment where the Fed is walking on eggshells and only incrementally increasing rates, growth stocks should continue to have access to relatively cheap capital that they can use to expand and hire. In short, growth stocks have a really good opportunity to continue to outperform value stocks over the next couple of years.
Another great idea with the stock market at an all-time high is to buy into new and existing stocks on a regular basis. Whether that’s weekly, monthly, quarterly, or annually, buy into companies that you believe in regardless of where the three major U. S. indexes are valued.
Why, you ask? To begin with, the stock market has historically returned 7% over the long term, inclusive of dividend reinvestment. That suggests that if you’re buying into stocks regularly, you should be averaged into an attractive cost basis over time.
Further, buying into high-quality stocks on a regular basis helps to remove emotions from the equation, and it eliminates trying to « time the market. » Since it’s veritably impossible to accurately predict when the market will have its worst days or correct lower, you could just as easily miss out on its top-performing days if you aren’t regularly investing.
Last, but not least, trust the process and the long-term data. As noted, the stock market has returned an average of 7% annually, inclusive of dividend reinvestment. This would work out to a doubling an average of once a decade. Thus, even with the Dow as 22,662 now, it could very well be above 45,000 in 2027, based on the average return of stocks over the long term.
In addition, take into account just how much the bull thesis is favored over the bear thesis. Though there have been 35 stock market corrections since 1950, each and every one of these corrections was firmly put in the rearview mirror by a bull market rally within a matter of weeks or months, and in some rarer cases years. There are no guarantees in the stock market, but 35-for-35 is pretty darn close to one.
Trust the data and stay invested for the long term. If it worked for the investment greats like Warren Buffett, it can work for you, too.
Sean Williams owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
