Why you should you be investing when prices are at record highs

Record-high prices for shares and other assets make it tempting to follow the herd, but you should ask a few questions first.

Records are made to be broken, and that’s happening right now with investments everywhere.

It seems crazy that millions of people are suffering and dying during a global pandemic yet it’s party time on financial markets.

The US stockmarket is near record highs, Aussie shares are too, Bitcoin’s gone bananas, and Elon Musk quickly became the world’s richest man after his electric car company Tesla’s share price multiplied eight times in a year.

Much of the investment euphoria reflects the forward-looking nature of sharemarkets that see a vaccine-boosted 2022, and the fact that interest rates are so incredibly low that investors can’t find a decent return on anything else so they pile into current winners.

Elon Musk recently became the world’s richest person. Picture: Joe Raedle/Getty Images/AFP

A growing group of analysts say prices are too hot and are heading for a fall, while others expect the party to roll on.

This leads to a big question: should you buy into something that’s already trading at a record high?

The short answer is yes. Record highs are just a step up on a long ladder for many successful investments – for example, biotechnology giant CSL hit a record high $94 a share five years ago and is now more than $270 a share.

The long answer is complicated and requires you to do some digging, because it depends on whether the investment is a speculative bubble or a true long-term success. If it’s a bubble and the bubble pops, you’ll get splattered.

The best answer, I believe, is buying stuff at a record high is fine as long as it’s a small portion of your portfolio, you understand what you are investing in, and see solid reasons for it to continue growing.

Diversification is the cornerstone of successful investing. Picking winners is wonderful but history has delivered more losers than winners, so spreading your money across assets, companies and countries is wise.

Recently I’ve been berated by Bitcoin owners for not showing it enough love as it surged again, felt guilty about warning a colleague last year against putting all their money into Telsa shares, and frustrated by my own lack of investment aggression when markets weakened in 2020.

Sharemarkets have come a long way from the COVID-fuelled fear of March 2020. Picture: Bryan R. Smith/AFP

However, we are all products of our own experiences.

I had colleagues who bought Bitcoin in its last boom in 2017 then watched it plunge more than 80 per cent. I lost hundreds of thousands of dollars in shares bought with borrowed money during the GFC before gaining most of it back in the decade-long recovery.

Australia’s All Ordinaries Index, which values our 500 biggest stocks (not including dividends) sits at the same level it was in 2007 – so no growth in 14 years.

Wealth for Life Financial Planning principal Rex Whitford says the fear of missing out “is a very strong part of our human psyche”. He recommends limiting exposure to booming sectors – such as US tech stocks – to 5 per cent of your portfolio, seeking professional advice, and buying smaller parcels over time rather than one big splash.

I don’t want to sound like a broken record, but diversifying your investments delivers exposure to record highs while smoothing out the inevitable downturns.

@keanemoney