by Ron A. Rhoades, JD, CFP(r)
The U.S. stock market was near its all-time highs in late 2021 and many analysts suggested that it was overvalued significantly. So, the above question seems odd doesn’t it? Or is it?
Investors are optimistic. They put money at risk in hopes it will go up in value – not down. They don’t desire for the economy to decline. So why would they want the market to go down? Simply put… buy low, sell high.
Why investors might want stocks to decline in value?
On Feb. 19, 2015, $1,000 purchased roughly 19 shares of the Vanguard Total Stock Market Index Fund, which is a fund weighted on market capitalization and is the entire basket of U.S. stocks. Now, fast forward nearly seven years, and $1,000 purchases only about 9 shares of the same fund.[i] (This disregards dividends and capital gains, which would approximate 2% per year.)
This raises the question: buy stocks at a cheaper value, or later at a much richer price? The answer of course is “I want to buy stocks when least expensive!”
The inherent problem …When is the high? When is the low?
No one rings a bell at the top or the bottom. The stock market can go to higher highs and lower lows. The lows may be temporary and minor. But they also may last several years or longer and may be severe.
History has shown that to predict the markets direction consistently over long periods of time seldom works.
So how do you invest when everything seems too high?
First, embrace investment strategies that have worked over long periods of time. Second, use a disciplined approach.
Investment is not speculation. History shows a long investment time horizon, say ten years, allows greater probability of outperformance from the stock market and a higher return than cash. Regardless when the investment was made.
An Investment Philosophy that Withstands the Test of Time
- Center on the efficient market hypothesis.
- Emphasize prudent capital allocation and patience.
- Carefully select asset classes to invest in.
- Seek out the best means to harvest the returns offered by that asset class, over the long term.
- Risk management is equally important as investment selection.
- Rebalance the portfolio when prudent to do so.
This investment philosophy, centered on strategic asset allocation with periodic rebalancing, has endured through the test of time for long-term investors.
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Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is an Associate Professor of Finance within its Gordon Ford College of Business.
Called “Dr. Bear” by his students, Dr. Rhoades is also a financial and investment adviser with Scholar Financial, LLC. To request further information about Scholar Financial, LLC’s fees and services, please email AdvisorINFO@ScholarFinancial.com. Thank you.
[i] Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), price per share retrieved as of 12/14/2021, wherein price was $114.56 per share.