Record Highs! What do we do??
“What goes up, must come down!” But does this ring true for shares too?
Physics and investing are two completely different topics, but humans are conditioned to think that after a rise in something… there must come a fall.
We are often conflicted when we get record-high share prices; obviously pleased to see a rise in value but apprehensive of a seemingly inevitable and dramatic fall in the future.
At times like this, we can often be fooled into thinking “I must do something!” – not invest, sell, change our portfolio weightings – believing that surely the stock market is due a correction. How often have you heard that phrase!!
But there is plenty of evidence that suggests our efforts to ‘improve results’ will just as likely penalise them.
The laws of physics
The laws of physics tell us that what goes up must come down.
Thankfully physics and investing are two completely different topics. Shares are not heavy objects kept aloft through strenuous effort.
Instead, they are essentially perpetual claim tickets on a company’s earnings and dividends. Thousands of people go to work every day seeking to contribute and offer profitable returns for companies, while providing the goods and services that people desire. Although some new ideas and the businesses behind them end in failure, history offers evidence that investors around the world can be rewarded for the capital they provide.
You should take comfort knowing that share prices are not fighting the forces of gravity?
When they rise in value and reach record highs, this tells us that the system is working just as we would expect – nothing more.
Each and every day shares must be priced to deliver a positive expected return for the buyer. Otherwise, no trade would ever take place. It is difficult to imagine a scenario where investors freely invest in shares with the expectation of losing money.
Instead, investors should treat record-high prices with neither excitement nor alarm, but rather indifference.
If shares have a positive expected return, reaching record-highs with some frequency is exactly what you’d expect to happen!
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There are no guarantee strategies will be successful.