When you’ve been investing for a while, you come across a situation where the stock market is too high. It comes with the territory because the stock market will never be fairly priced 100% of the time. 2020 and 2021 stock market is a prime example of the nonsensical run-up of the stock market.
In December 2021, my net worth hit all time highs and I felt like I was on top of the world. On top of that, I got a new job that came with a great raise and I felt invincible. I thought, “well, even if the S&P 500 goes down 10% next year, I can withstand it and it’ll work out fine”.
2022 proves that the stock market doesn’t just go down by 10%. Stock market has wild fluctuations that has a 100% downside risk. That’s what I didn’t understand going into 2022. I didn’t recognize that the stock market was too high in 2021 and thought that the good times will go on forever.
The good times DOES go on forever, until it doesn’t. The market spoiled investors rotten with the bull market that started in 2009 from the bottom of the market. A 12 year run is something that many people can get used to.
As a result of the market spoiling investors, we’ve forgotten what it feels like for a stock market to be too high.
If the market is just going to keep going up, what’s the point of thinking that the stock market is too high? It’s all going to get better next year anyway! That is a dangerous mistake and one that many people easily make. There are options you can pursue to combat these mistakes.
Investing When Stock Market Too High:
So then, your first thought could be, “what’s the point of investing when the stock market is too high? I’ll just wait a year or two and then invest!”. Not so fast. Even if you bought the S&P 500 at literally the all time highs every time from 1970 – 2022, you would still have been ahead by today.
The results may not have come as quickly as you would like. However, the results will come. Especially if you’ve been dollar cost averaging year after year. Think about how it would have been investing in the 2000s, the height of the tech bubble.
Investing $500/month from January 2000 to December 2009 would’ve meant investing $60,000. However, at December 2009, you would still have $64,000 to show for it. Sure, it wouldn’t have made you feel good but coming out ahead after experiencing two of the scariest stock market crashes doesn’t sound too bad to me.
Even if you bought at the all time highs of 2007-2009, you would have more than doubled your money by now. Even if the stock market is too high, that doesn’t mean that you won’t make money. It just means it could take longer than some of the earlier or other investing periods.
There are people who timed their investments at the worst time the world as ever seen in the past five decades who’ve still come out ahead. Even if we never recover to all-time highs, dollar cost averaging has been a good hedge against something like the lost decade of 2000 – 2009.
What to do When Stock Market is Too High:
The first thing to do when the stock market is too high is to SMASH that social share button and post to your favorite social media! Some people may be hoping for the stock market to do nothing but go up. However, they may not know what to do once the stock market actually does go up.
There are things you can do in order to combat this investment concern!
1) Buy Puts to Protect Downside Risk
After Mark Cuban sold his company to Yahoo, he subsequently and arguably made the greatest stock market trade ever. He saved his $1.4B fortune from crashing as a result of the possible and impending stock market crash. He used options to literally lock in his gains that he realized from investing.
As a result, many people called him too careful, thinking that the stock market is just going to keep going to infinity. When the market finally crashed thereafter is when Mark Cuban had the last laugh. When you’re literally happy with the gains you’ve already made, it’s not a bad idea to lock it in.
I was very happy with my $440,000 fortune in December 2021. So happy that I thought I was very close to retiring in 2022 and having work be optional. I was very wrong and that’s when I realized that it’s not a bad idea to take some risk off the table by buying puts when you’re happy with your gains.
One of my friends bought a put on the S&P 500 to protect himself from the impending recession and stock market crash. Locking in your profits isn’t a bad way to go.
2) Buying Conservative Investments
I-Bonds have been the best performing investment in the entire 2022 investing year. The risk-free rate of almost 10% is too good to pass up. Also, even then, the rate is projected to go even higher over the next year. Even staying in simple cash during turbulent times have done wonders for investment returns.
When the stock market is too high, it’s not a bad idea to switch risks and take some risk off the table to add to the conservative investments. CDs have been paying better rates than the negative returns we’ve been seeing in the stock market.
Conservative investments are your friends, especially when the stock market overheated and people think the good times are going to last forever. Good times have NEVER lasted forever. There’s always been boom and bust cycles.
The cycle will never change and people will experience it throughout their life.
3) Keeping it in Cash
I’ve been hoarding as much cash as I possibly can these days because the stock market is too high. There’s no guarantee that I’ll keep my job tomorrow and I would rather be 100% protected than be afraid of missing out on gains. Having cash come in while risk assets are declining is a life saver.
These days, my banks’ savings account pays me 1.20%, which has been great in preserving my wealth somewhat. I’m saving up to pad up my emergency fund to protect me for 1+ years. Right now, I have six months worth of an emergency fund. It’s what keeps me sane and gives me peace of mind.
The stock market crash of 2022 decimated my net worth and my spirits. There’s nothing wrong with trying to rebuild and prepare for the next downturn by hoarding cash. I may miss out on significant gains as a result. However, I am 100% on board with that.
Protection and peace of mind is what I’m looking for these days.
4) Ignoring the Noise
If you feel like something bad is going to happen, something bad is going to happen. It’s classic Murphy’s law. When the stock market is too high, it may still be in your best interest to continue to invest into the market.
Ignore the bad things that are happening in the world because the stock market historically emerged 100% from the bad times.
Right now, even though I’m continuously hoarding more cash than I normally would, I’m still consistently investing into the market. I’m still contributing to my 401k, HSA, and Roth IRA. I don’t want to make excuses and I’m lucky to still be in a position to do so.
When the stock market is too high, it may still be a good idea to plow ahead and keep investing as much as you can afford. Some people may drop out of investing altogether and that’s never a good idea. The stock market crash of 2007-2009 did precisely this.
The habit to invest should never be broken.
5) Consistently Invest Your Baseline Investment Amount
If you’ve been investing $6,000 per year and you can still afford to, then there’s nothing wrong with doing so in order to protect your upside. However, not continuously investing because you think the stock market will go down is timing the market and not recommended.
No matter what, I’m still maxing out my 401k and investing in the S&P 500 without fail. Every two weeks, I invest between $2,000 – $3,000 in the S&P 500. I have no idea if it’ll work out but I have no other choice but to have faith in the long term health of the US economy.
I also consistently take advantage of the company match for my 401k. My after-tax brokerages haven’t seen the love as much as before. However, it doesn’t affect or bother me. As long as I max out my 401k, I know that I’m going to be protected later down the road even if the stock market is too high right now.
Cash has been king in these uncertain times.
Stock Market Too High is a Real Thing
Too many people think even if the stock market is high, it can only go higher. That’s not true. The stock market can go higher AND the stock market can go lower. The ones who don’t think that the stock market is too high are the ones who lost their shirt when it comes to investing.
I am investing in my 20s to set my 30s and 40s up for success. It may be scary when the stock market is at the highest point you’ve ever experienced. It may be scary thinking that you could lose all your hard earned money the next year.
However, now is not the time to change your baseline level of investments.
Sure, take some risk off the table if you want to. However, your consistent investing strategy should not change because as long as you’re investing in high quality and sound investments, it should work out in the long run. The ones who have to most regrets in 2032 are the ones who didn’t invest in 2022.
There are so few investors in the world who actually stick with their investment strategy over the long term. You don’t want to be like the many who quits at the first sign of trouble. When you see people flocking away from investing is when you should keep investing.
There are many strategies you can explore when the stock market is too high. You don’t want to leave the wealth building game because not having money feels miserable. I’ve been there before. No matter what, I’m consistently investing in the markets and taking risk off where I can.
Stock Market Too High: Checklist
- Buy puts
- Buying conservative investments
- Keeping it in cash
- Ignoring the noise
- Consistently invest your baseline investments
Puts and calls are pretty advanced techniques with their own risks and benefits; I wouldn’t recommend them for beginners. Or even intermediate investors.
They can work well if you know what you’re doing. But “if” is the largest two-letter word in the English language 😉
And it’s an even bigger two-letter word when it comes to the world of finance, ha.