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.
S&P 500 all-time highs by decade
Source: Bloomberg, RBC GAM. Data as of January 1, 1950 to December 31, 2020.
What do market highs mean for investors?
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.
Here’s how you would have done if you had invested only at all-time highs in the S&P 500 Index from 1950-2019. Some would consider this the “worst” possible time to invest. But the chart shows your returns would be close to the average return of the index for one-, three- and five-year periods:
Investing at all-time highs vs. all-dates
Source: Bloomberg, RBC GAM. Data for S&P 500 as of January 1, 1950 to December 31, 2020. All-dates refers to rolling 1-, 3- and 5-year returns starting from each trading date during this time. Returns in U.S. dollars. An investment cannot be made directly into an index. The graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results
What’s more, this chart 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.
How often does a big correction follow a market high?
For long-term investors who are skeptical about investing in this environment, it may be helpful to know just how rare market corrections from all-time highs have been. The charts below show how often the S&P 500 Index has finished down greater than 10% over various periods of time, following each of the 1,170+ all-time highs since 1950.
How frequent are market corrections following all-time highs?
Source: Bloomberg, RBC GAM. Data as of January 1, 1950 to December 31, 2020 in U.S. dollars.
- Looking out just one year from each all-time high in the S&P 500, market corrections greater than 10% have occurred only 6.5% of the time.
- As we extend the time horizon, market corrections become even rarer. In fact, the S&P 500 has never been down by more than 10% at the end of a 10-year period following any of its all-time highs since 1950.
- Long-term investors have the advantage of an extended time horizon. Staying invested can help them stick to their financial plan.
Time provides perspective for long-term investors
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.
One approach that can help you invest through market ups and downs is dollar cost averaging. Your financial advisor can help you incorporate this strategy into your long-term financial plan. With a solid plan in place, you’ll be better prepared for whatever lies ahead.