Investing in the stock market when the market is at all time highs

This newsletter is intended to alert investors that many stocks have become expensive to purchase, because the market has risen more than 10% — nearly 2,000 points — since the presidential election. Now that the Dow Jones Industrial Average has hit 20,000 and the S&P 500 and NASDAQ Composite are at record highs, we need to be cautious about the prices at which we buy. Why? Because a stock purchase only works if there is still meaningful upside from your entry point. That sounds simple, but it isn’t — many investors make the mistake of buying stocks at all-time highs.

Your goal should be to buy at a good entry point to take as much risk as possible out of the trade. One way to check yourself is to compare a stock’s P/E to the S&P 500’s average P/E. The S&P 500 currently trades around a P/E of 26. When researching a potential buy, look at its current P/E and try to buy below its three-to-five-year average. The P/E ratio is simply the stock price divided by earnings per share, and it is a useful way to see how expensive a stock is relative to the broader market. Also study the trading range: you want to buy closer to the lower end of the range. That’s easier said than done — it takes patience — but most of the time a well-researched stock will eventually come back to you when the market pulls in. Remember: buy growth stocks with strong historical sales and earnings growth at a reasonable P/E and price. It isn’t always possible to buy below the five-year average P/E, but it is a principle worth following. The classic mistake is buying high and selling low because of emotion. Stay the course, make your own decisions, and keep researching the stocks you own.

Even with markets at all-time highs, we at CFE Finances believe you can still make money in stocks as long as you do the research and have conviction in your purchases. Do-it-yourself investors should always be on the lookout both to buy and to take profits when it is time. To all our customers who are invested or planning to invest: congratulations. Stock investors in the current market continue to benefit from both price appreciation and dividends. Good luck and happy investing from CFE Finances! We will be in touch with another newsletter soon. If you have any questions or concerns, please email us from our contact page.