Author Topic: Don't buy equities, we're at all time highs!  (Read 4899 times)

Huskie87

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Don't buy equities, we're at all time highs!
« on: January 06, 2017, 01:56:38 PM »
I hear people say this and I can see why they think their logic is sound.  Certainly returns after hitting all time highs have to be lower than when we can 'buy at a discount', right?  So I thought I'd share some research on the subject...


In the last 90 years, or 1,080 months, 75% of annual returns are positive for the S&P 500.  Meaning, if we pick any month historically, there's a 75% chance that we earned a positive rate of return one year after and a 25% chance that the market was lower one year after.  But what about in the months where we set new all time highs?  We have reached new all time highs in 319 of the 1,080 periods, which is just under 30% of the time.  Of those months, 80% delivered positive one year returns and 20% of those months delivered negative one year returns.

So, this idea that new market highs are a reason to not invest is silly.  Historically the odds of success have actually been higher in months where we reach all time highs. 

Bracken_Joy

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Re: Don't buy equities, we're at all time highs!
« Reply #1 on: January 06, 2017, 02:07:56 PM »
This was a delightfully succinct explanation, thank you. I borrowed to send to a friend, who I had been discussing this concept with recently. Thank you! Your wording is much clearer than mine =P

frugledoc

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Re: Don't buy equities, we're at all time highs!
« Reply #2 on: January 06, 2017, 03:24:46 PM »
Great stuff. 

MrSpendy

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Re: Don't buy equities, we're at all time highs!
« Reply #3 on: January 06, 2017, 03:58:43 PM »
I think "it is probable for equities to return in the low range of their historical performance from these starting valuations" may be a more intelligent way of voicing the "don't buy at all time highs" sentiment. A quick google provided this article which I think articulates the role of starting valuation in predicting (or not predicting) returns.

https://pensionpartners.com/valuation-timing-and-a-range-of-outcomes/

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But if you look more closely at the table, what you’ll find is that the average returns, even in the highest valuation decile (90-100%), are still positive. So while overvaluation indicates a higher probability of a below average return, it does not suggest that one should expect a negative return. Therefore, shorting the market when it is deemed to be “overvalued” does not have a positive expectancy. The best you can say when valuation is extreme is that future returns are more likely to be below average.


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We can see that as well in the next table illustrating the percentage of positive forward returns. While your odds of a positive 7-year return are higher when starting from a low valuation, they are still at 84% when starting from the worst valuation decile. Only in the 2-5 year range starting from the worst valuation decile are the odds of a positive return below 50%.

And this

https://personal.vanguard.com/pdf/s338.pdf

« Last Edit: January 06, 2017, 04:00:15 PM by mrspendy »

powskier

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Re: Don't buy equities, we're at all time highs!
« Reply #4 on: January 06, 2017, 04:37:13 PM »
Good synopsis but great job on making the topic subject clickbait like, LOL.

Shor

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Re: Don't buy equities, we're at all time highs!
« Reply #5 on: January 06, 2017, 06:17:19 PM »
But this time it's different! This time, I'm smarter!

Heckler

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Re: Don't buy equities, we're at all time highs!
« Reply #6 on: January 06, 2017, 08:43:20 PM »
Im buyng EAFE and Canadian bonds now. Still investing, but not US till I balance back out

One Noisy Cat

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Re: Don't buy equities, we're at all time highs!
« Reply #7 on: January 06, 2017, 10:47:21 PM »
Gee, we passed the 20th anniversary of Alan Greenspan's "irrational exuberance" last month without notice...back when the DJIA was 6,430.   Now we are flirting with Dow 20,000

I would never say a crash can not happen. But I will say check out history and your situation to handle a variety of outcomes.

spokey doke

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Re: Don't buy equities, we're at all time highs!
« Reply #8 on: January 07, 2017, 08:47:34 AM »
Interesting to think about this in relation to the generally disparaged idea of chasing performance...as in: 'it's the stupid investors that jump in the market only after it reaches new highs'

Retire-Canada

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Re: Don't buy equities, we're at all time highs!
« Reply #9 on: January 07, 2017, 02:34:24 PM »
I was looking back at the ups and downs of the markets I invest it and it's been a wild ride even just the last few years. Plowing in money steadily has paid off.

financiallypossible

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Re: Don't buy equities, we're at all time highs!
« Reply #10 on: January 09, 2017, 10:16:41 AM »
In the last 90 years, or 1,080 months, 75% of annual returns are positive for the S&P 500.  Meaning, if we pick any month historically, there's a 75% chance that we earned a positive rate of return one year after and a 25% chance that the market was lower one year after.  But what about in the months where we set new all time highs?  We have reached new all time highs in 319 of the 1,080 periods, which is just under 30% of the time.  Of those months, 80% delivered positive one year returns and 20% of those months delivered negative one year returns.

A reasonable analysis to consider, but this completely ignores the magnitude of the change. If the average return in the 80% positive case were just say 4 or 5% and the average loss in the 20% negative case is 30%, then wouldn't you want to at least slow down (or temporarily halt) your buying of additional US stocks?

Huskie87

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Re: Don't buy equities, we're at all time highs!
« Reply #11 on: January 09, 2017, 10:47:39 AM »
That's a great point.  My post was simply to suggest that because we're at all time highs doesn't mean that we'll "probably be lower a year from now" and that a correction is certain to come in the near future.

But since you asked... 

In the months in which we reached all time highs, and were higher one year later, returns averaged 18.5%
In the months in which we reached all time highs, and were lower one year later, returns averaged -9.9%

Rough math here (.8*.185)+(.2*-.099) = .1285

Meaning, historically we've averaged 12.85% returns in the year after we set new all time highs.

It was a great question though.  If the positive periods were all delivering very small returns, and the negatives were delivering large losses, the expected rate of return could have absolutely been negative.  Fortunately, it hasn't been.  Of course, that's no assurance that this trend will continue in the future.  It just hasn't been true historically.

Huskie87

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Re: Don't buy equities, we're at all time highs!
« Reply #12 on: January 09, 2017, 11:26:18 AM »
Here's a great calculator for questions like that: https://dqydj.com/sp-500-return-calculator/

What you'll see is that long term equity returns (from around 1927) are close to 10% (as measured by the S&P 500, dividends reinvested).  However, this is a different calculation than 'average'.  When we simply average those rolling 12 month periods, average returns are more like 12%.  This is just the difference between calculating using geometric vs. arithmetic averages.  It's impossible to do the analysis I've presented here with geometric averages, because we're looking at different segments throughout history (one year periods after reaching all time highs), so therefore we must use arithmetic. 

You don't need to understand what I've just said there, suffice it to say that expected returns are about 2% less than long term returns when markets are at all time highs.  This is still a very large positive number and should provide plenty of reassurance to anyone who is scared of record market highs being reached. 

steveo

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Re: Don't buy equities, we're at all time highs!
« Reply #13 on: January 09, 2017, 05:48:50 PM »
Here's a great calculator for questions like that: https://dqydj.com/sp-500-return-calculator/

What you'll see is that long term equity returns (from around 1927) are close to 10% (as measured by the S&P 500, dividends reinvested).  However, this is a different calculation than 'average'.  When we simply average those rolling 12 month periods, average returns are more like 12%.  This is just the difference between calculating using geometric vs. arithmetic averages.  It's impossible to do the analysis I've presented here with geometric averages, because we're looking at different segments throughout history (one year periods after reaching all time highs), so therefore we must use arithmetic. 

You don't need to understand what I've just said there, suffice it to say that expected returns are about 2% less than long term returns when markets are at all time highs.  This is still a very large positive number and should provide plenty of reassurance to anyone who is scared of record market highs being reached.

Great post. It puts into perspective why buying stocks and staying the course is a great approach.

Metric Mouse

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Re: Don't buy equities, we're at all time highs!
« Reply #14 on: January 10, 2017, 12:14:42 AM »
Reminds me of the "unluckiest investor" who only bought on market peaks throughout their life - they still came out quite well...

World's Worst Market Timer
« Last Edit: January 13, 2017, 06:03:21 PM by Metric Mouse »

Livingthedream55

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Re: Don't buy equities, we're at all time highs!
« Reply #15 on: January 11, 2017, 07:37:32 AM »
Very helpful!

Car Jack

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Re: Don't buy equities, we're at all time highs!
« Reply #16 on: January 11, 2017, 08:27:07 AM »
Time in market, not timing market.

I did a count at the end of 2016 and found that during the year, there were, I think 16 new market highs for the Dow.  Meaning that people who didn't want to get in when the market was at a high should be sitting in an Ally account collecting their 1% rather than looking at the 21% gain for the Dow.  I guess 1% is good.......right?

Ryland

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Re: Don't buy equities, we're at all time highs!
« Reply #17 on: January 11, 2017, 10:46:42 AM »
Great post. And something that has been in my mind with the Schiller PE being so damn high.

Turning my subjective mind into an objective investor is the biggest thing I can do to win at investing. 

Thank you!

libertarian4321

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Re: Don't buy equities, we're at all time highs!
« Reply #18 on: January 11, 2017, 10:57:16 AM »
Just like Warren Buffet, I'm not smart enough to time the market.

So I just invest regularly and consistently.  Even when the market is "at an all time high!!!!!!" (seems like it has hit that level more than a couple of times in the 30-years I've been investing).  And muddle through life as a multimillionaire next door type.