Investors often become cautious about the stock market when it is reaching or surpassing all-time highs. The main concern is that buying at these levels can often feel like “buying high” and that opportunities have passed. However, history has shown that on average, investing at all-time highs isn’t significantly different than investing at any other period.

To look more in depth, let us start with a simple fact – the stock market is often achieving new all-time highs. The chart below reflects that from 1950-2020, the S&P 500 set 1,130 different all-time highs. Despite turbulent periods throughout those seven decades, with 11 recessions² and the “lost decade” from 2000-2010, the S&P 500 has averaged 16 new highs per year.

Not investing due to all-time highs is one of the many justifications people use to avoid stocks. The opposite fear – buying when markets are falling with the expectation that they will continue to fall – is also common. While these fears are at opposite ends of the spectrum, it is often the same reasoning – things are bound to get worse. Despite these beliefs, the actual data in the graph below shows that returns are quite close if investing at all-time highs versus any other date. The average returns of 1–5-year periods are slightly lower for investing at all-time highs, but the level of difference is small and certainly does not reflect that all-time highs lead to future declines.

Investors tend to give greater focus toward the most recent events, and the most recent investment at all-time highs was painful. After reaching an all-time high in January 2022, the S&P 500 had a meaningful decline throughout 2022 and entered a bear market (a fall of more than 20% from the most recent high). The market bottomed on 10/12/2022 and has more than recovered, setting a new all-time high on 1/19/2024³. The performance to achieve all-time highs coincided with global conflicts, slowing consumer demand, elevated inflation, and significant interest rate fluctuations – all concerns that could have kept investors from enjoying the returns that the market achieved to reach all-time highs.

Again, using history as a guideline, it is interesting to see what returns looked like under several circumstances when we have achieved all-time highs after a bear market (like we experienced in 2022).  The data below reflects that performance even after achieving the all-time high has still been positive in most 1-to-10-year scenarios.³

In conclusion, new highs can be a mental challenge, creating fears of “buying high” and a potential future downturn for stocks. History would suggest this is not the case and stock market performance can continue in the following years. Avoiding investing because markets are at their highs coincides with only buying when things are “more certain.” Both are, in effect, an attempt to “time the market” which is extraordinarily difficult to do successfully over time. At Gradient Investments, we believe that “time in the market” is more important than “timing the market.” Furthermore, investing in a diversified portfolio and adjusting allocations to a risk tolerance is, in our opinion, a more prudent approach than waiting for the perfect time to invest.

1. https://www.rbcgam.com/en/ca/learn-plan/investment-basics/investing-at-all-time-highs/detail
2. https://www.thebalancemoney.com/the-history-of-recessions-in-the-united-states-3306011#:~:text=How%20often%20do%20recessions%20occur,as%20long%20as%20a%20decade.
3. https://awealthofcommonsense.com/2024/01/new-all-time-highs-after-a-bear-market/
4. FactSet/Yahoo Finance