Historically, All-Time Highs Are Nothing to Panic Over
With the S&P 500 reaching all-time highs for the first time in nearly 2 years, many are skeptical that a bear market is coming. Investors are often tempted to assume extremes are always around the corner - either a new bull market or the next bear market. The reality is that somewhere in the middle is where most investing happens - but we often mistake it for the extreme.
Part of the reason I think it’s difficult to invest at all-time highs is fear that your timing will be terrible. All good things must end and eventually market highs will be followed by a bear market. However, it’s important to remember that most of the time markets go up, just not all the time. And periods after all-time highs are no exception. From 1950-2020, if you invested only during all-time highs in the S&P 500, your returns would be 11.6% over 1-year on average, just marginally lower than the 12.5% average on other days. The longer-term return averages look good too – at 10.9% over 3 years and 10% over 5 years.
In addition, the chance of a significant downturn that lasts for over a year is minimal. Only 6.5% of the time that we reached all-time highs was the S&P 500 down more than 10% a year later.
I’m not suggesting we should be massively bullish and ignore significant risks that are present such as higher stock valuations, geopolitical tensions, and an upcoming election. The reality is that sometimes all-time highs are short-lived and a bear market follows. This was true in 2000, 2008, and more recently in 2020 and 2022. But in the interim, there tend to be many consecutive all-time highs.
How you should invest should be based on your investment plan, which is informed by your financial plan. Every dollar should have a “use-by date” and your investments should be allocated according to that plan. When you do this, you know what you can afford to invest for growth over the long run, that might be subject to short-term volatility, and what needs to be invested conservatively so it’s available when you need it regardless of market performance.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.