Key takeaways
Market highs can raise concerns about their sustainability and potential future corrections in the market. However, market highs are also a necessary occurrence in growing markets and can signal positive underlying market conditions.
- Since 1960, the S&P 500 index has reached a new high 1,195 times.
- Historically investing in the S&P 500 index at a market high showed similar returns to investing on any other day considering investment periods of 1-,3-, and 5-years.
- Investing at market high risks potential losses from corrections, though a reasonable investment horizon can help mitigate this risk.
- Waiting for a market pullback before getting invested may result in remaining uninvested for an extended period and missing out on potential gains from investment.
Investing over time
Investors seeking to preserve and grow the value of their wealth over time often turn to equity markets in an attempt to achieve this, and indeed many equity markets have delivered growth over the long term, albeit with some volatility and drawdowns along the way.
Growth over time by definition requires that new highs are reached, however investing at a market high can raise concerns about potential corrections or market downturns, which can make it a psychologically challenging decision to invest when markets are reaching new highs.
Market Highs are not unusual
Since 1960, the S&P 500 index has charted 1,195 new highs.
Some decades experienced hundreds of market highs, while others - such as the 2000s which saw large drawdowns following the Dot Com bubble and Financial Crisis - saw far fewer.
| Decade | Number of Market Highs |
|---|---|
| 1960's | 229 |
| 1970's | 35 |
| 1980's | 190 |
| 1990's | 311 |
| 2000's | 13 |
| 2010's | 242 |
| 2020's | 176 |
| Average per year | 18 |
Investing at Market Highs
While investing into an asset at a new high may seem daunting, historically it did not result in lower returns on average. Rather an investment decision should be made considering the underlying economic fundamentals and bearing in mind the investor’s circumstances and time horizon in relation to their goals.
The next chart shows historical forward-looking returns over 1-, 3-, and 5-year periods for the S&P 500 index after investing at a market high in comparison to on any other day.
Market highs can be a positive signal of beneficial underlying economic conditions. And the same conditions that drove markets to new highs may continue to support growth.
The risk of investing at market highs varies with the investment horizon. Market volatility can lead to significant losses if corrections occurs soon after investing which may result in lower-than-expected returns. However, a reasonable investment horizon (1,3, 5 years or more) can help mitigate these risks through greater recovery potential and the power of compounding as markets historically recover and grow over extended periods of time.
Waiting to invest
For investors who believe that the market in question will continue an overall positive trend within their time horizon, but prefer to wait for a pullback before investing, we examine how such an approach would have performed historically for an investment into the S&P 500 index.
Using data from 1960 we consider the forward returns from investing into the S&P 500 index at a market high for a period of 1-, 3- or 5-years, and compare these to the returns from waiting for a pullback of 5%, 10%, or 20% from this level before investing.
| Pullback size: | 5% | 10% | 20% |
|---|---|---|---|
| Average waiting time (trading days) | 143.1 | 225.2 | 290.4 |
| % of observations invested | 62.5% | 44.9% | 25.4% |
In all cases the investment period is measured from the date of market high. While waiting for a drawback the funds are considered to be held in cash.
In some instances, the index didn’t experience the specified pullback within the time frame and waiting for such a pullback before investing resulted in not getting invested at all.
Since 1960, following a market high, it took on average 143 trading days before a 5% pullback was experienced, which would have translated into being invested only 62.5% of the total trading days.