BY KENT KRAMER, CFP®, AIF®, Chief Investment Officer, Foster Group
“I don’t have a fear of heights. I do, however, have a fear of falling from heights.” – George Carlin
The first album (yes, a 33 rpm, black vinyl LP, vintage 1972) that my parents ever took away from me was by comedian George Carlin. He was definitely R-rated but also very clever (though as a middle school boy I was more impressed by the profanity than the philosophy).
Carlin’s right! The thing that makes us afraid of heights is the possibility of falling from them. The higher and the more exposed we are, the greater the sense of risk and anxiety.
Investors have been experiencing some fear of heights recently. Many stocks and stock markets are at or near all-time highs. Markets were at or near all-time highs in 2007, right before the Great Financial Crisis and a financial downturn that saw many stocks lose over 50% of their market value between October 2007 and March 2009. In 2020, markets reached all-time highs in February, just before the COVID pandemic set in, and the S&P 500 fell 35% in less than two months.
The question, then, becomes “Should an investor sell out, or not buy any more shares, every time a stock market reaches a new high?”
Historically, that would have proven to be a poor strategy as stock markets, more often than not, have simply pushed on to new highs in the following months. Dimensional Fund Advisors calculated that the average return of the S&P 500 for one-year periods following new market highs was 13.9%. For the three years post-new market high, the average annualized return was 10.5%. These are averages, but the point is made: Reaching a new market high does not predict a bad year upcoming.
In US dollars. Past performance is no guarantee of future results. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,127 observation months in the sample. January 1990–present: S&P 500 Total Returns Index. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.
Long-term, diversified, stock market investing versus short-term speculating rests on the idea that companies and economies will find ways to innovate, be productive, and adapt in order to remain growing and profitable. The stockholders of those companies benefit by sharing in the profits through dividends and capital appreciation over time.
One of my favorite ways to think about this kind of economic progress is to evaluate the performance of the U.S. stock market over generations of time, 20 to 30 years, instead of quarters or even weeks.
My mom was born on June 14, 1935. For those who know her, Mary is still a very sharp woman! The Dow Jones Industrial Average stood at 119 when she was born 86 years ago.
I was born 26 years later, October 21, 1961. It was Homecoming Saturday in Iowa City, and my dad’s beloved Hawkeyes beat Michigan. He wasn’t all that happy to miss the game, but I wasn’t willing to wait to arrive! The Friday before I was born, the Dow closed at 706. That represented an annualized increase of almost 7% from 1935, which would have been even higher had the return calculation included dividend reinvestment for the entire period.
On October 21, 1994, my daughter, Karsen, was born. Yes, we share a birthday. Over the exactly 33 years between my birth and hers, the Dow rose 9.62%, on average, and closed at 3,891, a cumulative gain of 1,975%!
Twenty-six years later, on April 5, 2021, Karsen gave birth to Savannah Joy, our third grandchild. On that day, the Dow closed at 33,527, very close to an all-time high, up a cumulative 1,491%, or 11.02% annualized.
So here’s the question investors need to ask themselves today: ”Do you think that stock markets 26 years from now will be higher or lower than they are currently, even if today is an all-time high?”
On April 5, 2047, when little Savannah turns 26 and perhaps delivers me a great grandchild, what might the Dow, representing the stock market, close at? If it were only to rise 6% per year, well below its historical average, it would close at 161,679! If it rose an average of 8%, closer to the long-term historical average for stocks, it would close at … wait for it … 267,816! In either case, today’s near all-time high, close to 35,000, will look relatively low in retrospect.
Even with all the negative headlines of the past few years, the larger story of the world, generationally, is one of dramatic progress. Extreme poverty rates and child mortality have declined dramatically. The percentage of the global population with access to basic education, vaccinations and literacy has increased. Technology is advancing at rapid rates. Are there still disparities and room for progress to continue? Certainly. But has progress been the rule, rather than the exception? Also, emphatically yes.
As investors, should we expect recessions and recoveries, bear and bull markets, along the way? Absolutely! But, as a long-term investor with a generational time horizon, are you going to delay investing today because things are going well? For the vast majority of stock market investors, one generation’s “Peak”, even an all-time high, will most likely turn out to be the next generation’s “Trough”, a low point that will be hard to imagine in retrospect.
| Kent Kramer