This thought evokes two distinct opinions depending on your relationship with your 60 year old self:
1) Both of you are friends; You have been investing in the past (and are looking out for your buddy) and have significant exposure to the market.
Your portfolio is either in the green or the red. You are evaluating whether to book your profits and/or lower your investments.
2) Both of you have just gotten to know each other; You are about to begin on your investing journey.
You are hoping the market will fall so that you can buy the dip, maximise your returns, and become friends with your 60 year old self.
In both these situations, you are predicting a market correction in the near-term and are hoping to time the market to perfection.
The market should ideally correct just like it did in Feb-Mar 2020, Right?
Well, let us dispel this myth and help you understand why this is not the right approach in looking out for your future self.
1) You can never truly predict if and when the market will correct. On a probability basis, there is an equal chance of either occurrence. Yes, you can read a lot of reports and understand all macro-economic trends influencing the market. But, at the end of the day, this will be a prediction which has its chances of being incorrect.
2) Say, you have a crystal ball and can estimate with significant certainty that the market will actually correct. Even in that case, if you are a long time investor, the value you realise over time will almost be minimal.
Sounds counter-intuitive right? Let's analyse a J.P. Morgan study (“Is it worth investing at all time highs?”) conducted in 2020 with data over the last 30+ years1.
The facts of this study shows that if you invested in the S&P 500 on any random day since the start of 1988 and reinvested all dividends, your investment made money over the course of the next year 83% of the time. On average, your one year total return was +11.7%.
Additionally, if we only consider investments on days when the S&P 500 closed at an all-time high, the results are actually better! Your investment made money over the course of the next year 88% of the time, and your average total return was +14.6%.
And, if we look at cumulative total returns three or five years after the original investment, the takeaway is the same!
Well, we are not suggesting that you take all your savings and pump it in the market when it is high. But, we are trying to emphasise on the point that seeking to time the market and expecting to invest when it is down is not the right approach. For a long-term investor, the best approach is to stick to the investment approach and asset allocation based on your personal finance philosophies. This is what will make your 60 year old self best buds with you :)
So what exactly should you do when the market is at an all time high?
We have a few simple suggestions for you on how to plan your investments in during this time-
1) Stick to your principles on systematic long term investing and do not try to make a quick buck. While you might make profits in the short term, this thinking will bias your decisions in the future and may severely impact your financial health.
2) Evaluate your sectoral portfolio exposure (across asset classes as well) and seek to rebalance to reach your optimal portfolio & asset allocation mix. This should be similar to the one you created while detailing your financial goal basis on your risk profile.
3) If you plan to book some profits or have made profits post the rebalancing, do not withdraw the money and buy that Gucci belt you’ve been eyeing. Either reduce your debt, invest in a tax saving instrument (like a PPF) or invest it in a liquid debt fund and save that money for a rainy day. That money belongs to your 60-year old pal, please keep it for him/ her.
Always remember, growing your wealth through investing is more about being systematic and inculcating the habit of periodic investment.
Succeeding in the long-run is all about making the right short-term choices day in and day out and sticking to the financial plan you have outlined for yourself. This is what will make you truly wealthy in the long run.
This post assumes you are-
1) Not a psychic
2) Not a day trading wizard
3) Not Rakesh Jhunjhunwala in the making