What to Do When the Stock Market is High?

With the stock market reaching a record close for the 30th time in 2024, investors are starting to come down with the most common illnesses that cause people to make dumb decisions. greed and ignorance. These euphoric emotions are what end up being the deciding factor between becoming a successful long-term investor versus becoming a gambler in the stock market.

Like anything you do, there are times when you're going to have success, whether it's because of being at the right place at the right time or having a solid foundation of knowledge it's important in anything you do, not just investing to always focus on the fundamentals.

For example, if you want to take an exotic vacation to let's say, Hawaii and flights are $5,000 for a round trip, you probably wouldn't be too excited about that price, unless maybe there's a once-in-a-lifetime event happening in Hawaii such as an outdoor concert featuring Taylor Swift, Elvis Presley, The Beatles, Stevie Wonder, Elton John, and the Grateful Dead.

Now, with those circumstances, if all of these musical artists are performing at a once-in-a-lifetime event, you probably could justify paying top dollar for a moment in time that will most likely never occur again.

Investing is the exact opposite. When the prices of any investment get too high, it doesn't make sense to blindly throw money at it because it's been going up in value. This is where many investors, financial institutions, and financial professionals get it plain wrong. Investing the same way year after year is the definition of insanity. Doing the same thing over and over. Anticipating a different result.

Each year deciding where to put your hard-earned money needs to evolve with what's going on in the world, where are the current prices of investments, and ultimately be adaptable rather than a one-trick pony. That's why the fundamentals are so important.

A quick history lesson. In December 2017, Coca-Cola reached a P/E Ratio above 100. This means that the price of their company's stock relative to their earnings is very very very expensive. But, you're scared you're going to miss out so you decide to jump onto the bandwagon because Coca-Cola is a great company and Warren Buffett loves them.

Fast forward in time and it would have taken you about 4 years for your shares to increase in price where you would be profitable if you are an investor who wants to hold investments for the long haul (not including dividends).

Versus, if you had waited for the price to become more attractive, which took less than 6 months, you could have purchased at a more attractive price. And by purchasing at a more attractive price, you would have been able to increase your overall return by remaining patient.

Now, it's easy to say this after the fact. You still would have had a large run-up heading into 2020 and would have had to detail with the market pulling back in 2020 and 2022. But, when you buy a great investment at such an attractive price, you don't care about the fluctuations.

When you do your homework and have a system to follow so that you're purchasing the best possible investments and the most attractive price, you will find yourself winning more than losing. Especially if you have a long-term outlook when it comes to investing money.

So, when you see all the MEMES and the "Financial Experts" on social media who make money by selling courses and creating content that pays them. Make sure you stick to the basics because it's always best to keep it simple.

To Growth, Family, & Philanthropy,

Joshua Krafchick | 369 Financial