Today we observe three common possible client personalities... helping you gameplan for each around all-time highs.

Markets have rung in Q3 with a slew of new all-time highs, bringing with it a handful of interesting psychological biases. For us trend followers, the lack of resistance for major domestic equities makes it a bit more difficult to pinpoint specific price targets on charts. From a psychological standpoint, this presents itself in a handful of well-studied theories, namely the anchoring bias which uses previous/initial information (in this case previous highs) as an anchor point to make other data (new-all time highs) seem comparatively “unrealistic.”  Some other clients may not wish to play into the “Greater Fools Theory” which suggests that an asset's value can be artificially inflated as long as one person can find someone else “dumber” to buy it at a higher price. Both of these can subconsciously impact all of us, but even more so our clients who watch the headlines day in and day out. Skepticism of “perceived value” of markets can cause clients to doubt their investment roadmap you have built for them, sending them off track over the course of their lifetime. Today’s article will attempt to give you ammo to speak to different clients about how “staying the course” around all-time highs is critical over time.

We will start our study by introducing three hypothetical portfolios. Each starts in January of 1950 with $100. At the end of each month, each portfolio will aim to add an additional $500 to the pot, simulating a respective client contributing to an account over the course of their lifetime. The first portfolio will do this, month in and month out, without question. This will be our “Average Joe” portfolio (baseline.) The second portfolio, nicknamed our “Skeptical” Investor,” will add $500 to the portfolio as normal unless markets are at/near all time highs (within 5%) and overbought (SPX with weekly OBOS of >70%.) In this case, he will skip out on his monthly and investment and roll it over until the next month, when he will try again. He isn’t in a rush to buy something overvalued, so if markets stay overbought for multiple months, he will wait. When things do eventually cool down and aren’t overbought, he will deploy all his saved up cash into SPX at once. Finally, our third investor, nicknamed “scared investor” will add $500 to his portfolio as normal, unless markets are previously defined “overbought.” At that point, he will start getting nervous, saving his monthly contributions for the “big pullback” his neighbor recently told him about. He will continue saving until he is convinced markets are now oversold, defined by a weekly OBOS reading of <-70 for SPX, at which point he will regain confidence and dump all his saved contributions into the market.

Obviously, this isn’t completely realistic. In the real world, contributions will change over time and can happen at any point throughout the month. Regardless, the sandbox scenario provides some insight into how your different client types can react around all-time highs. The table below details each portfolio’s value over time, ending with data through 7/15. Putting aside immense success of each portfolio (each grew to over 20 million on their initial $100 with monthly contributions,) the “Average Joe” who bought regardless of market condition saw the best performing portfolio over the entire study. Again, its worth noting that our “skeptical” and “scared” clients still did quite well… but in their attempts to avoid overbought markets at all time highs, they wiped out 950k-1.3 million from their ending value. Some would make the argument that starting in 1950 is entirely impractical. The math holds true for more realistic starting points. A similar study starting in 1980 (initiation of traditional 401k contributions) or 2000 (more “modern” times) reveal very similar statistics.

All of this to say, we can’t stop our clients from getting nervous around all-time highs (or any other market environment for that matter.). We can, however, provide a roadmap to explain that more often than not, simply continuing to buy into a strong market can pay off (or at least doesn't hurt) regardless of how it may feel to do so.