Is Investing at a "Market Peak" Prudent?
We often get the question, “is now a good time to invest, even though stocks are at an all-time high?”
Many investors are worried that investing in stocks right now is especially “dangerous.” After all, the market is a mere stones throw away from an all-time high.
While we understand it can be difficult to invest at a time when stocks have reached new highs, the fact of the matter is that under most circumstances, it really doesn’t impact returns.
That is - as long as your time horizon is long enough!
You will note in the graph below that there is very little difference in longer term returns when investing at a market peak versus any other market level.
For illustrative purposes only. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market highs observations. There were 1,139 observation months in the sample. January 1926–December 1989: S&P 500 Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. January 1990–Present: S&P 500 Index (Total Return), S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
There are things that investors can do that can have a meaningful impact on overall portfolio “returns.” Here are a few ideas:
Make sure that you have an adequately funded emergency fund. Doing so will eliminate the need to sell at a bad time.
Diversify your portfolio across a variety of asset classes. This serves to reduce portfolio risk over the long term.
Utilize low cost and tax-efficient investments in order to maximize your after-tax returns.
Is investing at a market peak prudent? You betcha!