The headlines say it all: "The S&P 500 closes at an all-time high." When you include dividends reinvested, an investment in a market ETF like SPDR S&P 500 ETF (SPY -0.38%) is up a ridiculous 160% since March of 2009.
News like this has investors nervous. And if you think about it, they should be nervous -- a run like this is bound to come to an end, right?
Actually, no. The market should -- and does -- routinely hit all-time highs. Over long time frames, the market has gone up more often than it has gone down, so it only makes sense that we see all-time highs occur with regularity.
A historical perspective
If you go back to 1950, this point becomes clear. By taking the weekly closing price of the S&P 500 (^GSPC -0.46%), we see that in 37 of the past 64 years, an all-time high was hit. In other words, there's a greater-than-50% chance that in any given year, an all-time high has been reached.
What happens when investors get nervous and sell out during these periods? From time to time, they save themselves from short-term pain, as in the dot-com bubble and the Great Recession. But over the long run, some stretches of huge appreciation are completely missed.
Don't believe me? The areas represent years when an all-time high was reached.
Source: Yahoo! Finance.
Further reinforcing this point, when all-time highs are reached in a given year, notice when they occur:
|
When All-Time High Occurred |
% of the 37 Years When All-Time Highs Were Hit |
|---|---|
|
Last Week of Year |
24% |
|
Last Month of Year |
41% |
|
Last Quarter of Year |
70% |
Source: Yahoo! Finance.
Does this mean we are guaranteed to hit an all-time high in the last quarter, month, or week of 2013?
Absolutely not. These are averages across more than half a century. What this means is that there's a reason the end of the year has more instances of all-time highs. Put simply, because the market tends to go up more than down, it makes sense that the market would be higher later in the year, rather than earlier.
If you're a long-term investor, there's no disputing the historical evidence that you've got nothing to worry about when the market hits an all-time high. Finding great companies selling for reasonable prices remains your surest bet to invest successfully.
