Investing at all-time highs.
Sometimes markets seem to race from one high point to the next. At times like these, investors may face what some refer to as ‘psychological barriers to entry.’ They may question whether it’s the best time to put new money into the market. After all, investing at all-time highs means paying a price that no one has ever paid before – creating a seemingly guaranteed recipe for regret.
This kind of thinking is linked to trying to time the market.
Investors who do this try to avoid market highs and buy at market lows. But timing the market is almost impossible to get right. And, all-time highs are not uncommon – so you would be missing out on a lot of opportunity if you tried to avoid them. In fact, since 1950 the broad U.S. equity market has set 1,130 all-time highs along the path to its current level. That’s an average of over 16 every year.
New market highs are not as meaningful as some people may think.
Often they have to do with continued growth of the economy and corporate profits. While there are periods of time when the economy and markets slow down, over time improvements in productivity and innovation have continued to propel markets towards new highs. This can generate strong long-term results for investors, as long as they stay invested.
How you would have done if you had invested only at all-time highs?
Let’s imagine that you had invested at all the market highs in the S&P 500 Index from 1950-2019. Some would consider this the “worst” possible time to invest. But Market history shows your returns would be close to the average return of the index for one-, three- and five-year periods:
What’s more, this period covers some of the worst times in the stock market. This includes Black Monday (October 1987), the Tech Wreck of the early 2000s and of course the global financial crisis of 2008. Nevertheless, when markets are sitting near all-time highs, many investors still can’t help but feel a bit uneasy about putting new money to work. Some investors make the decision to remain in cash and wait for a large correction before they invest. However, often times a significant correction never comes, leaving the investor with the regret of missing out on investment returns. There’s no way of knowing what lies ahead in the near term. What history tells us is that stocks tend to move higher over the long term. New highs are a normal occurrence and don’t necessarily warn of an impending correction. They may in fact signal that further growth lies ahead.
Time in the market vs. timing the market
It’s important to understand that trying to time the market seldom works. Equity markets can get volatile in the short term, but over the long term they tend to rise. This means that an investor who stays in the market generally has a much higher probability of long-term success than one who tries to pick the perfect time to invest.
The lesson here is that investing at regular intervals is an effective and potentially less stressful approach to building wealth over the long run and during any type of market.