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Last month, I joined Jesse Cramer on The Best Interest Podcast to talk about investing at all-time highs and preparing for the next market crash. The conversation touched on several other interesting topics, so I wanted to share those insights here with you.
You can find the original audio version of the episode on The Best Interest website, but below are some highlights from the conversation:
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Investing at All-Time Highs [00:25]
All-time market highs happen frequently, as the market tends to rise over the long term. While there is a psychological tendency to think “what goes up must come down,” the data shows that after reaching new highs, the market has historically continued to perform well.
Trying to time the market and avoid downturns introduces more risk than staying invested through volatility. Investors should have a plan in place that accounts for regular market declines and recoveries.
See EP.137: Investing in Stocks at All-Time Highs
Market Cycles and Volatility [02:47]
The stock market experiences regular declines of 10% or more, occurring about every 12 months on average. Larger bear markets of 20% or more happen around every 3.5 years, and 30%+ declines occur roughly once a decade.
Preparing mentally and emotionally for these inevitable downturns is crucial, as fear and anxiety can lead to poor investment decisions. Diversification across asset classes and maintaining a long-term perspective can help manage volatility.
See EP.117: What’s the Best Strategy For Investing a Large Amount of Cash?
The Limits of Market Timing [09:20]
Attempting to time the market introduces significant risk of missing out on gains and making emotionally driven mistakes. Incentives of financial media and pundits often prioritize attention-grabbing claims over long-term investment wisdom.
The most successful approach is to maintain a disciplined, diversified portfolio aligned with one’s long-term financial goals.
See EP.10: The Secret to Market Timing
The Cyclical Nature of Stocks [15:52]
The stock market’s cyclical nature means investors should expect to experience prolonged periods where their account values remain below previous all-time highs. There are three periods in particular that are worth noting in which cash outperformed the S&P 500:
- 1929-1943 (15 years)
- 1966-1982 (17 years)
- 2000-2012 (12 years
This type of extended underperformance is not uncommon and highlights the importance of maintaining a diversified portfolio, including international stocks, to navigate these cycles.
While these lengthy downturns can be psychologically challenging, staying the course and avoiding emotional reactions is crucial for long-term investment success.
The Connection Between Stocks and Earnings [22:19]
Over the long term, stock prices closely track the underlying earnings growth of the companies they represent. While short-term market movements can be driven by investor psychology and sentiment, the fundamental driver of equity returns is the ability of companies to generate increasing profits.
Three key factors determine stock market returns: changes in earnings, cash returns to shareholders (dividends and buybacks), and changes in valuation multiples.
Resources:
- The Best Interest Podcast
- EP.137: Investing in Stocks at All-Time Highs with Jesse Cramer
- EP.117: What’s the Best Strategy For Investing a Large Amount of Cash?
- EP.10: The Secret to Market Timing
The Long Term Investor audio is edited by the team at The Podcast Consultant
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