The Difficulty in Calling a Market Top
Trying to “time the market” is both highly risky and incredibly difficult.
Stocks hitting new all-time highs can be great if you’re already invested, but if you’re just entering the equity market or are considering adding to your portfolio, the recent market milestones might give you pause. After all, investing is all about the future, and if stocks reach an “all-time high,” what will that mean for tomorrow’s returns? After you climb to the top of a mountain, isn’t “down” your only option?
While this kind of thinking might be understandable, it’s also often short-sighted. Not investing – or, worse, pulling your money out of the market – after stocks reach a new high is essentially calling a market top, fearing prices have nowhere to go but down. And while that’s certainly a reasonable impulse, especially amid the constant presence of worrying economic and geopolitical headlines, making investment decisions based on fear rarely leads to the outcomes you want – especially given how difficult timing the market really is.
This Day in Stock Market History: August 18, 2020
On August 18, 2020, the S&P 500 reached a new all-time high despite the ongoing Covid-19 pandemic and typical election year turmoil. While many at the time felt the rally in stocks was unearned (and potentially primed for a reversal), the new all-time high was instead a harbinger of better days ahead. The S&P 500 rallied another 44% through January 2022 as the economy reopened from pandemic lockdowns with a gusto. And even with the inflation and interest rate-driven bear market of 2022, the S&P 500 has since continued its ascent, closing nearly 150% above its pandemic lows – and over 60% above the closing level on August 18, 2020.
“Timing the market” – the investment strategy of buying in when the market is at its lowest and selling at its peak – requires near-perfect foresight to succeed. Since 2020, there have been more than 120 new all-time highs in the S&P 500. Each of these moments was the “market top” for a brief time, and each was surely accompanied by worrisome headlines. But selling on any of these days would have prevented you from participating in the next new high, and the new high after that. Plus, for market timing to work, you have to be right twice – not only when to get out, but when to get back in. It’s not only nearly impossible to accomplish with consistency, but it is also highly impractical, as trading costs and taxes accumulate with activity.
That’s why we recommend a well-diversified portfolio as a core piece of any financial plan. It mitigates the risks that come with trying to time the market, and it lets you take advantage of pockets of the market (stocks, sectors, etc.) that have not yet reached new highs via regular rebalancing. Further, the truth is that investing in the S&P 500 at all-time highs has actually been a good strategy over the last several decades. In markets, momentum begets momentum, and new all-time highs typically signal good news rather than calamity. So, rather than thinking of a new all-time high as the top of a mountain, imagine it instead as merely another base camp along the long climb to investing goals – something to acknowledge, but not the ledge or peak many envision it as.
There’s an old investing adage – Bull markets don’t die of old age. Instead of calling a top or trying to time the market, we believe you’ll be better served by talking with your Baird Financial Advisor about your priorities, creating a sound investment strategy and getting your money to work as soon as possible.
Editor’s Note: This article was originally published December 2019 and was updated March 2024 with more current information.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
