While it might seem counter-intuitive, it is actually better to invest when the market has hit an all-time high, rather than sitting on the sidelines with cash.
Just because the US stock market has recently hit an all-time high, doesn’t mean you should be worrying about getting into investing.
New research from Schroders shows that over a 12 month period, since January 1926, investing in US large cap equities at a new peak will yield on average 10.3 per cent, compared to 8.6 per cent at all other times.
However, when looking at investing over 24 months and 36 months, the results are more evenly matched. When it comes to 24-month investing, the data showed it yields eight per cent annually for both options, and 36 months yields 7.6 per cent annually for investing at an all-time high, compared to 7.5 per cent otherwise.
This is counter-intuitive, but it is because all-time highs in the stock market are usually followed by more all-time highs. While some peaks are followed by crashes, it is a lot more commons for the market to continue going up than crash completely.
Humans are ultimately the ones controlling markets, and our emotions lead us to follow each other’s leads. Volatility tends to cluster in downturns, while all-time highs tend to cluster in upturns.
Of the 1,176 months since January 1926, the US stock market was at an all-time high in 354 of them, or 30 per cent of the time.
Additionally, it was found that $100 invested in the US stock market in January 1926 would be worth $85,008 by the end of 2023 in inflation adjusted terms, or a 7.1 per cent annual growth.
However, a strategy that pulled out of the market and into cash every time the market hit an all-time high would only yield $8,790, or a 4.7 per cent return annually.
Even looking over a shorter time frame, $100 invested 10 years ago would yield $237, compared to $181 if an investor switched to cash every month the market hit an all-time high.
The same result is true for 20 years ($382 versus $255), 30 years ($864 versus $403) and 50 years ($3,031 versus $1,180).