3 Things 9-28-26

Thing One

The Stock Market Is at a Record High. Does That Mean It’s Too Late to Invest?

There is something psychologically difficult about buying something today that you could have bought for less six months ago. That is particularly true with stocks. When the stock market is falling, investors worry that it will keep falling. But when the market is rising and making new highs, many of those same investors become reluctant to invest because they think they have already missed their opportunity. It creates an interesting dilemma: If I don't want to buy when the market is going down, and I don't want to buy when the market is at a high, exactly when am I supposed to invest?

The term "all-time high" sounds ominous. It can make it seem as though the market has reached some sort of ceiling. But that's not really what an all-time high means. Think about the long-term history of the stock market. If businesses grow, earnings increase and the economy expands over time, we should expect the market to periodically reach levels it has never reached before. In fact, a market that grows substantially over several decades has to make a lot of new highs along the way.

Historical numbers are interesting here. J.P. Morgan examined S&P 500 returns from 1970 through 2023 and compared investing at all-time highs with investing on other days. The average 12-month price return after investing at an all-time high was 9.4%, compared with 9.0% when investing on other days. Over the following 24 months, the averages were 20.2% after an all-time high and 18.5% after other days.

That certainly doesn't mean stocks will rise after today's high. History doesn't tell us what will happen next. But it does challenge the assumption that "the market is at a record high" automatically means "this is a bad time to invest."

None of this means investors should ignore valuation. There is a big difference between saying, "The market is at an all-time high," and saying, "Stocks are expensive relative to the earnings those companies are producing." The first statement tells us where prices are compared with the past. The second begins to tell us something about value. That's why I pay attention to things such as earnings, earnings growth, interest rates and price-to-earnings ratios rather than simply asking whether an index happens to be at a record level.

Consider a simple example. A company earning $5 per share with a $100 stock price and a company earning $10 per share with the same $100 stock price may have identical stock prices, but you're not buying the same thing. Price by itself doesn't tell you whether something is expensive.

For a long-term investor, "Is the market too high?" may therefore be the wrong question. How long will I be investing? How much volatility can I tolerate? Am I properly diversified? Am I investing money I may need soon? What am I actually paying relative to the earnings and growth I expect? And perhaps most importantly, what is my alternative if I don't invest?

Holding cash can feel safer because the balance doesn't bounce around every day. But cash has risks too, including the possibility that inflation gradually reduces what that money can buy. There will eventually be another market decline. There always has been. There will also probably be more record highs.

The challenge for investors isn't figuring out how to avoid both. It's developing an investment strategy that doesn't require knowing which one comes next.

Thing Two  

Your Retirement Number May Be the Wrong Number

"How much money do I need to retire?" It's one of the most common questions in financial planning. Is it $1 million? $1.5 million? $2 million? Those numbers are easy to understand, which is probably why we focus on them. But I think they can also cause us to look at retirement planning backwards.

Consider two hypothetical retirees. One has $2 million saved but wants to spend $150,000 every year, still has a substantial mortgage and has relatively little guaranteed retirement income. Another has $800,000 saved, a paid-off home, Social Security and a pension covering most basic living expenses, and needs only another $20,000 or $25,000 per year from investments. Who is in the stronger retirement position? The answer isn't obvious simply by looking at their account balances.

During our working years, we tend to measure financial progress by accumulation. How much is in my 401(k)? How much have I saved? What's my net worth? But retirement changes the equation. Now the question becomes: How much does my lifestyle cost, and where will the money come from to pay for it?

Suppose a couple expects to spend $75,000 per year in retirement. If Social Security and pensions provide $55,000, their investments need to provide the remaining $20,000. Another couple spending the same $75,000 but receiving only $30,000 from Social Security and other reliable income sources needs their portfolio to produce $45,000. They have the same lifestyle but a very different retirement problem.

Then there are all the things that complicate the math. Taxes matter. A dollar in a traditional IRA isn't necessarily the same as a dollar sitting in a checking account because withdrawals from the IRA will generally be taxable. Health care matters. Medicare can cover a substantial portion of retirees' medical expenses, but Medicare isn't free and it doesn't cover everything. Inflation matters too. Someone retiring at 65 may be planning for a retirement lasting 25 or 30 years, and even relatively modest inflation can significantly increase the cost of maintaining the same lifestyle over that amount of time.

Debt matters. Housing matters. Social Security claiming decisions matter. Even flexibility matters. A household that could comfortably reduce discretionary spending during a severe bear market is in a different position from one whose entire retirement budget consists of expenses that can't easily be changed.

This is why I prefer thinking about retirement as a financial system rather than a savings target. You have expenses going out. You have Social Security, pensions or other income coming in. You have investments available to make up the difference. And you have taxes, inflation, health care costs and market fluctuations affecting everything along the way. Your investment portfolio is extremely important, but it's one piece of that system.

So instead of only asking, "Do I have enough money to retire?" I would add a few more questions. What will it actually cost me to live the way I want to live? How much of that cost will already be covered by Social Security, pensions or other income? How much will I need to withdraw from my investments each year? What happens to my plan if the market falls? What happens if I live longer than expected? And what expenses could I change if circumstances required it?

Once we know those answers, the size of the investment account starts to mean something. There isn't a magic retirement number that works for everyone. There is, however, a retirement number that works—or doesn't work—in the context of your life.

Thing Three

Just A Thought  

“For every complex problem there is an answer that is clear, simple, and wrong.” - H. L. Mencken