“Fear is the most contagious disease you can imagine!”
The stock market seems to be on a bull run. Apple stock price has jumped by 40% in the last 6 months and Tesla has soared almost 120%. It is tempting to quickly jump into the market.
When stock prices are high, it might not be the best time to invest heavily in the stock market. Here are 7 reasons why:
Investing when stock prices are high can expose you to increased risk. Buying stocks at their peak means there is a higher possibility of a price correction or a market downturn. If the market experiences a significant decline, your investments could lose value quickly, potentially eroding your capital.
Limited upside potential
The principle of buying low and selling high is undermined when you invest at peak prices. When stock prices are already high, the likelihood of substantial future gains becomes limited.
While the market may continue to rise, the potential for significant returns diminishes, reducing the overall benefit of your investment.
Investing during an overvalued market puts you at greater risk of a significant market correction that can negatively impact your investments.
High stock prices often indicate a period of overvaluation, where prices have exceeded the intrinsic value of the underlying companies.
Over time, the market tends to correct these imbalances, resulting in a decline in prices.
Investing in a market with high prices can be emotionally challenging. Seeing prices rise to new highs can create a sense of fear of missing out (FOMO) and the temptation to jump into the market without thoroughly evaluating the fundamentals.
Emotional investing can lead to hasty decisions, which may not align with your long-term investment goals.
Lower dividend yields
Investing in high-priced stocks could result in lower dividend yields, reducing the income potential of your portfolio and limiting the benefits of dividend reinvestment.
When stock prices are high, dividend yields tend to be lower. Dividends are an essential component of total returns for many investors.
High stock prices often coincide with increased market volatility. Market volatility can create substantial short-term price swings, which can be unsettling for investors. If you’re not prepared to withstand heightened volatility, investing in a high-priced market may subject you to unnecessary stress and emotional turmoil.
Timing the market
Attempting to time the market, especially when prices are high, is notoriously challenging. Even experienced investors struggle to consistently predict short-term market movements.
By waiting for a more favorable entry point when prices are lower, you can reduce the risk associated with market timing and potentially achieve better long-term investment results.
Final word from Warren Buffet
“The stock market is designed to take money from the active to the patient.”