Investing During All Time Highs

So far, markets have rewarded investors well in 2024 (knock on wood), with the S&P 500 up about 17%. It was only 18 months ago when the S&P ended 2022 with a nearly -20% return, one of its worst annual returns in history.

It's easy to forget, but before that slow and continuous decline, the S&P opened 2022 at an all time high. It was impossible to know at the time, but we wouldn't see the S&P set another all time high until more than two years later.

For those who were able to stomach the decline of 2022, by staying invested and committed to their plans, the payoff has been more than worth it. The market has been able to make back its decline and plenty more, on its way to setting a new all time high on 38 different days this year.

You've likely heard the phrase "buy low, sell high", which might make you wonder whether investing during market highs are a good idea or not.

If you've read anything I've written before, you may know that I believe it's always a good time to be an investor. Let's dive into markets during all time highs, and why I believe, like any other time, it's the best time to be an investor.

Key Takeaways:

• No one knows what will happen in the short-term, and our guess has more potential for bad than good.
• Luckily we don't need to know what is about to happen, a long-term mindset shows us what has always happened.
• Long-term investing erases short-term volatility, the trick is staying invested for as long as possible.

We can't know what will happen

To get a better sense of all time highs, let's take a look back at the past 55 years of data. The chart below shows the number of all time highs in a calendar year going back to 1970.

As you can see, there's no real pattern. There are periods of years with new highs, and periods of years with none. But we really can't predict them ahead of time with accuracy. The chart below shows the number of all time highs per decade, again no logical pattern emerges.

The periods of no new highs follow market declines, where the market drops quicker than it recovers. Even though we don't see new highs during these periods, we still see extraordinary growth. Investors who continue making their regular contributions and reinvest dividends, will actually see a gain when the market breaks even (as long as they are invested properly).

Maybe the best pattern that we can pull from the data is that new all time highs come in bunches. Typically, multiple in a year that has at least one, and for multiple years at a time, although it's not guaranteed.

Since the first all time high set earlier this year, the S&P is up another almost 15%. If you were worried about buying high after that new high and sold to get out of the market, you would have missed out on a huge return over a short period of time. And that's just the return so far.

Of course the market could have dipped and gone the other way, but even if it did, we know that it's normal for markets to experience volatility and that over the long-term they trend up and to the right. By trying to avoid something bad that we think might happen, we could put ourselves on the sidelines for when something good happens. With investing, we know the good heavily outweighs the bad.

We don't need to know what will happen

The truth with investing, is no one knows what will happen over a given period of time. The shorter our timeline, the less certain we can be because the range of historical outcomes is higher.

That might seem like bad news, but another truth, is we don't need to know exactly what will happen.

Peter Lynch, one of the most successful investors in history, put together data looking at three fictional investors who each invested $1,000 annually from 1965 to 1995. The first always invested on the most expensive day of each year. The second always invested on the cheapest day of each year. The third always invested on the first day of each year. 

Over the 30 year period, the first investor averaged an annual return of 10.6%, the second investor averaged an annual return of 11.7%, and the third averaged an annual return of 11.0%. Perfect market timing only added 1.1% over the worst market timing, and only 0.7% over no timing at all.

Another more recent study from Charles Schwab, looked at five fictional investors who each had $2,000 a year to invest over a 20 year period from 2003 to 2022. Here's who they were and when they invested each year: 

• Peter – the best day
• Ashley – the first day
• Matthew – equally each month 
• Rosie – the worst day 
• Larry – never

Here are their results concluding the 20 year period: 

Having perfect market timing didn't provide that much more return than simply investing on the first day of each year. The study looked back at a total of 78 rolling 20 year periods going back to 1926. In 68/78 studies they found the exact same order of results. In the other 10, investing on the first day of the year never came in last. The only real loser in the study, was never investing at all.

Regardless of when you choose to invest, as long as you do invest, you're going to fall somewhere in between best timing and worst timing. Over the long-term, the difference is small enough that you'll get more benefit from focusing on other things. And if you happen to be an investor with the absolute worst timing, you're still going to end up with incredible long-term results.

A good plan survives uncertainty

Since we can't know what is going to happen, and it really doesn't matter that we don't, it makes the most sense to stick to our financial plan, regardless of what the market is doing.

A good plan should take into consideration all of the good, all of the bad, and everything in between. A plan that requires action to combat normal market volatility, is a plan that is in desperate trouble. A plan should be designed for the reality of markets, not what you want to have happen.

In most cases, sticking to your financial plan is going to mean doing nothing differently at all. Looking at what happens after an all time high, we actually see that the chances of the markets being down are quite low. This data looks at the more than 1,250 all time highs since 1950, and how often the S&P is down more than 10%.

We can see that the odds are slim at best. With a 0% chance historically of the S&P being down more than 10% five years after a new all time high is set. If you're worried about buying at the high, I think this chart puts that worry to rest.

As I've said before, being able to distinguish between what matters and what doesn't matter is an underrated skill. Worrying about markets being at all time highs, very simply, is a waste of your time and energy, and only creates unwarranted stress.

Historical data shows us that we can't predict what will happen in the short-term, that even if we could time the market perfectly it makes little difference, and that over the long-term our results get better and better.

If you're looking at ways to improve your overall financial picture, focusing on short-term, inconsequential things, won't really help you. You're likely better off to focus on things that: do matter, and are within your control. Things like:

• Ensuring your investments are suitable for your risk tolerance and your goals
• Establishing an accessible emergency fund
• Reevaluating your savings rate to maximize long-term growth
• Updating your budget to reflect your current spending and priorities

Remember that investing is a long-term game. You should approach your investments as a long-term relationship, not a one night fling. There's going to be ups and downs, but it's all worth it. It's about doing the little things right for a very long time. It can be as simple as that if you let it.

"The first rule of compounding: Never interrupt it unnecessarily." – Charlie Munger

Keep doing things your future self will thank you for.