Investing when markets are at record highs. What do the stats say?
As of June 1st, 2021, The ASX has had eight consecutive months of gains, and is currently at record highs. European markets have had four consecutive months of gains, and US markets continue to hover near records. Since the GFC, there have been almost 300 new record high days recorded by the S&P 500 index. That is an almost one in seven chance over that time frame that the market could have hit a record high on a given day.
With markets around the world at record highs, is it a better or worse time to invest? We must remember that past performance is not a guide to future performance. Let’s see what the stats show.
JP Morgan research shows better average returns in S&P500 when investing at record highs between 1988-2020
JP Morgan’s study on 32 year returns in the S&P500 Index found that investing at the top of the market produced better one, three and five-year average returns, compared with investing for the same time period on any random day during that same time period.
Why might investing when markets are at record highs display statistically better returns?
One theory of why this may occur is that bull runs seem to beget bull runs. When a market is running hot, there are less people running for the exits.
Yes, there will be moments of panic, moments of profit taking, moments of forced selling by some players, and there will be individual stocks that take heat or potentially go bust, but at a diversified index level, such as with IVV, the iShares Australian listed S&P500 ETF, where you effectively invest in multiple stocks and assets at once, you don’t take the full heat of those stings.
How missing the best performing market days can affect your returns
The graph below shows how missing just 10 of the best performing ASX 200 Accumulation Index market days has the potential to cut your returns in the long run. If you miss the best 30 days, it removes nearly all your return. It’s almost impossible to predict when the best days will be; being disciplined and investing for the long term is one way to avoid the risk of missing them.
What does the magic crystal ball say?
No one knows where the market is going next, which is precisely why you will see a disclaimer on most financial products saying that past performance is not a reliable indicator of future performance.
The point is, you can never know where the top and the bottom is, but the stats demonstrate there is no obvious reason to discourage someone from investing simply because we are at the top of the market.
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