How to Stay Rational When Markets Hit All-Time Highs

The S&P 500 has hit hundreds of all-time highs throughout its history. Each time, the same debate erupts: is it too late to buy? Should I take profits? Is this the top? These questions feel urgent in the moment but reveal a fundamental misunderstanding of how markets work.

Here's a statistical fact that should reframe your thinking: markets spend roughly a third of all trading days within 5% of their all-time highs. Being "at all-time highs" is not an anomaly — it's the normal state of a healthy, growing market. If you only invested when markets were well below their peaks, you would miss most of the best buying opportunities in history.

Yet the psychological pressure is real. When the market hits new records, two competing emotions battle for control. FOMO — the fear of missing out — pushes you to buy aggressively before prices go even higher. Meanwhile, vertigo — the fear of heights — whispers that a crash is imminent and you should sell everything. Both impulses are equally dangerous.

Howard Marks captures this tension perfectly in his concept of market cycles. Markets oscillate between greed and fear, and at all-time highs, both emotions can coexist in the same investor's mind. The disciplined response is neither to chase nor to flee, but to stick to your process.

Buffett's approach offers clarity. He doesn't make decisions based on where the market is. He makes decisions based on the value of individual businesses relative to their price. If he finds a wonderful company at a fair price, he buys it whether the market is at an all-time high or in a bear market. The market's level is irrelevant to the specific value proposition.

This doesn't mean ignoring valuation entirely. When broad market indices trade at historically elevated multiples, the overall opportunity set shrinks. There are fewer bargains to be found. But "fewer" doesn't mean "none." Even in expensive markets, individual companies can be mispriced due to temporary setbacks, sector rotation, or simple neglect.

A practical framework for all-time-high environments has three components. First, maintain your normal asset allocation. Don't let market levels drive you to dramatically increase or decrease your equity exposure. Your allocation should be based on your time horizon and risk tolerance, not on market sentiment.

Second, raise your quality bar. In expensive markets, the margin of safety on mediocre businesses evaporates. Focus your buying on the highest-quality companies — those with durable competitive advantages, strong balance sheets, and pricing power. These companies tend to hold up better during corrections and recover faster.

Third, keep cash reserves for opportunities. Buffett always maintains significant cash positions, not because he's bearish, but because he wants to be ready when individual opportunities appear. Having 10-20% of your portfolio in cash during elevated markets gives you the flexibility to act when prices temporarily dip.

What you should absolutely avoid is trying to time the top. Decades of research confirm that market timing destroys more wealth than any bear market. Missing just the ten best trading days over a 20-year period can cut your returns in half. Those best days often occur immediately after sharp declines — which means the timer who sold to "avoid the crash" also misses the recovery.

Charlie Munger's advice is characteristically blunt: "The big money is not in the buying and selling, but in the waiting." At all-time highs, the waiting is hardest. Your portfolio looks great, the temptation to lock in gains is strong, and the financial media amplifies every risk.

At KeepRule, we encourage investors to review their rules and principles precisely when markets feel most euphoric. Your pre-written investment discipline is most valuable when emotions are highest. The investor who follows their process — buying quality at reasonable prices, maintaining appropriate position sizes, and ignoring the noise — will outperform the one who reacts to every new market high with either panic or euphoria.

The market will keep hitting all-time highs. That's what growing economies produce. Your job isn't to predict when it stops — it's to maintain the discipline that compounds your wealth regardless of where the market stands today.