The market has had a fabulous run, but this peak doesn’t really matter

IF YOU have been in the stock market for a while, congratulations. Now that the market has reached a new peak, you have probably made some money.

And, if the news of a new market peak is enticing you to dip a toe back into the stock market – or perhaps drawing you in for the first time – this is a good moment to reflect on whether you have the emotional and financial resources to get in and stick with it for the long run.

On Jan 19, the S&P 500 surpassed the peak it had reached on Jan 3, 2022. After a miserable performance in 2022, the stock market had a fabulous run. Bond prices rose, too. These increases lifted investment portfolios around the world. Celebrate, by all means.

But then, get past it. If you are a long-term investor, this particular market peak is not likely to matter.

Staying in the market for decades, and reaping the full rewards of compound returns, including reinvested dividends, is a far surer road to prosperity than trying to time the market’s peaks and valleys.

Hundreds of peaks

Stock market peaks come and go. Much of Wall Street is occupied with forecasts of when these events will happen – and advice on when it is best to buy and sell.

This broad approach generally has not worked well, the data shows. I would not base investment decisions on the timing of market peaks and valleys, not if you are investing for the long haul.

The reason is that over the next few decades there will be hundreds of stock market peaks, if history is any guide. If you are able to stay invested in the market through all of them, you are likely to prosper.

Consider that if the latest market peak turns out to be memorable, we will all be in serious trouble. It would mean that this will be the last market peak for a long time to come – and that the market’s long-term march upward has halted.

SEE ALSO

This isn’t your father’s S&P 500. Don’t worry about valuations

Momentum trumps fundamentals

Forget 2024 market predictions: Stick with a balanced core portfolio

That could happen. The stock market’s rise is not inevitable. Stocks were down for almost two years in the latest cycle – which is why this peak has received so much attention – and they have at times failed to return to past peak levels for extended periods, notably in the 1930s.

But since 1926, the US market has been in a long – though frequently interrupted – upward trend. There are certain to be major setbacks along the way. But as long as capitalism continues to function, the stock market is likely to levitate, so that before long, the latest rally will be seen as nothing more than a tiny blip on an extended stock chart.

That is why the amount of time you stay in the market – not whether you buy and sell at opportune moments – is likely to be what really matters.

Sticking around in index funds

Think about what has happened in the United States market since August 1976.

For the kind of investing I practise – and a core approach emerging from academic research about finance – it makes sense to start then.

Though the wider world scarcely noticed at the time – and I certainly did not – the summer of the US bicentennial was a turning point in investing for working people. It was when Vanguard, under John C Bogle, made it possible for people with modest means to put money into the broad stock market without having to incur hefty fees, buy individual stocks or rely on supposedly expert advice on when to buy and sell.

Instead, for the first time, they could use low-cost index funds, which have become immensely popular, in traditional form or as exchange-traded funds, and are now offered by many companies. But Vanguard started it, with an innovation that is available today both as an S&P 500 index fund and as an exchange-traded fund.

In all its incarnations, the Vanguard fund has been cheap: It now carries a cost of only 0.04 per cent, a tiny fraction of the expenses that investors back then had to incur – and, often, still do – when buying individual stocks through the auspices of a broker.

Thanks to index funds like this one, holding the broad market and automatically reinvesting all your dividends is easy. You can buy it on your own or through a 401(k) from your employer. The numbers that follow do not account for expenses, but the costs of index funds are low enough that these numbers are reasonably close to those you would have experienced, for better or for worse, if you had held an S&P 500 index fund.

Compound returns

Since August 1976, the broad S&P 500 has risen so much that none of the many declines over that long period amount to much in comparison with the broad upward thrust of the market.

The worst bear market in that period will still be fresh in the memories of many investors. It occurred from Oct 9, 2007, to Mar 9, 2009, a period often referred to as the great financial crisis. From peak to trough in that period, the stock market fell 56.8 per cent, according to data provided by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices.

The losses in that stretch were horrible, and they serve as a reminder of the importance of broad diversification – not just in stocks but in high-quality bonds, especially Treasuries, which served as a portfolio buffer and provided reassurance to people who needed to draw on all their emotional reserves to stay fully invested.

Despite that fierce bear market – and six others, including the pandemic bear market that began on Jan 3, 2022 – these are the returns of the S&P 500 over the long haul from Aug 31, 1976, to November 2023, according to Bloomberg:

• Based on price alone, the S&P 500 rose 8.4 per cent, annualised, or a cumulative 4,338.6 per cent.
• Including dividends reinvested regularly in the index, the total return of the S&P 500 was 11.4 per cent annualised, or a cumulative 16,145.4 per cent.

That, in a nutshell, is the miracle of compounding. Individual market peaks and troughs for long-term investors were irrelevant. What mattered was staying in the US market throughout the entire period. That would have been true even without dividends.

But when you factor in dividends – which flow right back into your index fund and are used to purchase new fund shares, which generate more dividends, and on and on – the results are mind-boggling.

Imagine that you had been wise enough to put US$1,000 into the index fund on its first day in 1976 and to have been patient enough to have let your pot of money grow till last November. Your US$1,000 would have increased by US$161,454.

Future peaks

There is no assurance that the decades ahead will produce returns like these. And, in fact, academic finance generally recommends that you hold a piece of the entire global stock market, not just the S&P 500. The US market could well underperform other global markets in the decades ahead, and the S&P 500 does not even capture the performance of the entire US market.

Furthermore, the bad stretches that have already occurred in global stock markets – and that will be coming in the decades ahead – point out the importance of diversifying with other assets: bonds and enough cash to let you pay the bills when the markets crash.

Once that is done, though, what is not important, in the larger scheme of things, is timing market peaks and troughs. During the great financial crisis, for example, I spent an inordinate amount of time as a journalist speaking with so-called experts about when they thought the stock market would rise or fall. In retrospect, I believe that was a waste of time.

Suppose you had got the market cycle as wrong as you possibly could, but had nonetheless decided to become a long-term stock investor – and had actually stuck with it, despite colossal losses. That would have meant buying at the market peak of Oct 9, 2007. You would have lost most of your money by the spring of 2009, but you would have gained it back, and then some. These are the returns of the S&P 500 from Oct 7, 2007, to Jan 18, 2024, according to FactSet:

• Considering price alone, the index gained 7.1 per cent annualised, or 207 per cent cumulatively.
• With reinvested dividends, the index gained 9.3 per cent annualised, or 325 per cent cumulatively.

I concede immediately that you could have done better than this by buying and selling at “the right times”.

That would have entailed knowing in real time when the market was going to rise and fall, and no one knows that reliably over long periods. You could also have bought and sold the right stocks. Just owning Apple, for example, and nothing else, in the same period, and never selling it would have given you a total return of 3,760 per cent. If you did that, bravo.

But what is the right stock or stocks to buy for the next 15 years, and what is the optimal time to buy or sell? Some people will undoubtedly get the answers right.

I am not even going to try. This market peak means many things to many people. I take it merely as further affirmation of the wisdom of long-term, low-cost buy-and-hold investing. Let us put this peak behind us, and hope for many, many more.