One of the interesting realities of investing is that success can create its own anxiety.
When markets are down, investors worry because their account balances have fallen. When markets are up, investors worry because their account balances feel too high. And when markets are at or near all-time highs, it is natural to wonder: Is this the moment we should be getting more conservative? Should we hold extra cash so we can invest after the next pullback?
Those are understandable questions, especially after several years of strong market returns and renewed excitement around themes like artificial intelligence. On one hand, higher account balances feel encouraging. On the other hand, it can feel like we are waiting for the other shoe to drop.
But here is the challenge: investing based on that feeling requires us to be right twice.
First, we would have to know that today is the right time to reduce risk. Then, we would also have to know when to get back in. Is the market down enough after a 10% decline? What about 20%? What if it falls 10%, we wait for more, and then it quickly recovers? What if it keeps going higher after we raise cash?
This is why market timing is such a difficult game. It is not enough to be generally correct that markets will eventually correct. They will. The problem is that we do not know when, from what level, how far they will fall, or how quickly they will recover.
It may sound counterintuitive, but all-time highs are not unusual. They are a normal part of long-term investing. Dimensional looked at more than 1,000 monthly S&P 500 closing levels from 1926 through 2025 and found that returns following those highs were broadly similar to returns in other periods.
Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,199 observation months in the sample. January 1990-present: S&P 500 Total Returns Index. January 1926-December 1989: S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook, Ibbotson Associates, Chicago. For illustrative purposes only.
That makes sense when we step back. If markets have historically moved higher over long periods of time, they must regularly set new highs along the way. New highs are not a signal that the market has reached a ceiling. They are often simply the result of long-term growth.
That does not mean risk has disappeared. It does not mean valuations do not matter. It does not mean we should be careless. It simply means that “the market is high” is not, by itself, a sound reason to abandon a long-term plan.
In fact, moments like this are a good reminder of why a plan matters in the first place.
At Eaton-Cambridge, we do not build portfolios around predictions about what the market will do next month, next quarter, or even next year. We build portfolios around principles that do not change: diversification, discipline, tax awareness, risk management, and alignment with each client’s goals.
Diversification matters because we know corrections will happen, even though we do not know when. That means avoiding unnecessary concentration in individual stocks. It also means not limiting a portfolio only to U.S. companies. U.S. markets have performed extremely well in recent years, but strong recent performance can also lead to higher valuations. Vanguard’s 2026 outlook, for example, pointed to more modest expected long-term returns for U.S. equities and relatively more attractive opportunities in non-U.S. developed markets. (Vanguard)
That does not mean we are making a short-term call that international stocks will outperform next month or next year. We are not. But it does support the case for global diversification. In our portfolios, we generally allocate roughly 30% to 35% of the stock allocation to international markets, because we believe investors are best served by owning great companies around the world, not just in the United States. We simply do not know where the returns will come from year to year.
Past performance is no guarantee of future results. US market represented by the Russell 3000 Index. Due to data availability, ex-US markets represented by the MSCI All Country World ex USA IMI Index (net div.) after 1994; from 1979-1994, ex-US markets represented by the MSCI World ex USA Index (net div.). Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
The same principle applies to bonds and cash.
If a client expects to need income or distributions from the portfolio in the near term, we do not want that money dependent on what the stock market happens to be doing at the time. For known short-term needs, a cash or money market allocation can make sense. For ongoing portfolio distributions, high-quality bonds can provide stability, income, and a source of funds during periods when stocks are temporarily down.
Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against loss in a declining market. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. Average calendar year returns shown for years in which the S&P 500 Index return was negative. The S&P 500 Index had a negative calendar year return in 9 of the years from 1976-2024. Bloomberg data provided by Bloomberg. One-month US Treasury Bills returns provided by Morningstar.
In many cases, one of the starting points for determining a client’s allocation is asking: “How much income might this portfolio need to provide over the next five to seven years?” That number helps inform the bond allocation. The goal is not to eliminate volatility altogether, but to make sure the client is not forced to sell stocks at an unattractive time just to meet near-term cash flow needs.
This is the balance we are always trying to strike.
We want clients to participate in the long-term growth of markets. We also want portfolios to be durable enough to withstand the inevitable downturns along the way. That requires discipline in good times and bad times.
When markets are falling, discipline means not panicking.
When markets are rising, discipline means not getting greedy, concentrated, or complacent.
And when markets are at all-time highs, discipline means remembering that a high market is not a complete plan. Neither is cash on the sidelines. A complete plan is one that accounts for growth, risk, income needs, taxes, diversification, and human behavior.
Markets will correct again. We do not know when. We do not need to know when.
Our job is not to predict the next market decline. Our job is to help clients remain prepared for it, invested through it, and focused beyond it.