Understanding the Impact of Record Highs on Stock Market Investments

Changing your perspective on price

Often, a price increase doesn't correspond with an increase in benefits. For example, if the price of a dozen eggs goes up, it's not because eggs have suddenly become more nutritious or tastier. The same applies to a service like a haircut or an oil change.

The market is more expensive

The P/E ratio of the S&P 500 is a whopping 26.9. That's higher than normal, but it's not a sky-high valuation.

A better business deserves a higher valuation

Microsoft's trailing P/E ratio is 34.5 -- higher than its historic average. But notice how the company's median P/E ratio has increased in recent years, with the three-year higher than the five-year median, and so on.

The right way to invest

If you're buying a stock high, then it's important to make sure it's going up for the right reasons -- as in earnings, growth, and the investment thesis in general can back up the appreciation in the stock.