Understanding the Market | As the US stock market continues to hit new highs, why should investors not throw in the towel?

Zhitong App has learned that in mid-December 2023, the US stock market hit a new high, and the upward trend has not stopped since then. By the end of January 2024, the local stock market had risen nearly 3% from its previous high. Many investors may be very nervous about the possibility of a market downturn. Duncan Lamont, head of investment strategy research at Schroders, pointed out that although it is natural for people to feel nervous when the stock market reaches historic highs, based on past situations, choosing to abandon stock investments when feeling uneasy can be very damaging to wealth. Investors may have various valid reasons for not liking to invest in stocks, but the market being at historic highs should not be one of them.

In a high-interest environment, many investors also increased their holdings of cash in 2023. At a time when the stock market is at historic highs, investors may feel uneasy about the idea of allocating their funds to cash.

Duncan Lamont pointed out that based on the analysis of stock market returns data since 1926, the conclusion is: there is no need to be anxious. In fact, the occurrence of historic highs in the stock market is more frequent than imagined. Out of the 1176 months since January 1926, the stock market hit new highs in 354 months, accounting for 30% of the total time. On average, in the 12 months after the stock market hits a historic high, the investment return can outperform inflation by 10.3%, which is better than the 8.6% outperformance during other times, and the average returns for two and three years are also slightly better.

Duncan Lamont pointed out that if $100 was invested in the US stock market in January 1926, by the end of 2023, the inflation-adjusted value of that investment would be $85,008, equivalent to an annual growth rate of 7.1%. In contrast, if one were to switch to cash every time the stock market hit a new high in the previous month and then re-enter the stock market in non-high months, the inflation-adjusted value of that investment at the end of 2023 would be only $8,790, a whopping 90% less than consistently investing in stocks. The inflation-adjusted return of the asset portfolio invested in this strategy is 4.7%. Over time, the cumulative difference in returns can be quite significant. This study covers data from nearly 100 years, longer than what most people plan for. However, even from a shorter-term perspective, if investors cannot withstand the fear of a soaring stock market, they may miss out on significant potential returns.