A note from a dedicated reader inspired today’s article. It’s a question about the stock market and investing at all-time highs. It reads:
“Hey Jesse. So, back in March 2020 you said that you were going to keep on investing despite the major crash. Fair enough, good call!”
Note: here and here are the two articles that likely inspired this comment
But now that the market has recovered and is in an obvious bubble (right?), are you still dumping money into the market?
Thanks for the note, and great questions. You might have heard “buy low, sell high.” That’s how you make money when investing. So, if the prices are at all-time highs, you aren’t exactly “buying low,” right?
I’m going to address this question in three different ways.
- General ideas about investing
- Back-testing historical data
- Identifying and timing a bubble
Long story short: yes, I am still “dumping” money into the stock market despite all-time highs. But no, I’m not 100% that I’m right.
General Ideas About Investing at All-Time Highs
We all know that that investing markets ebb and flow. They go up and down. But, importantly, the stock market has historically gone up more than it has gone down.
Why does this matter? I’m implementing an investing plan that is going to take decades to fulfill. Over those decades, I have faith that the average — the trend — will present itself. That average goes up. I’m not betting on individual days, weeks, or months. I’m betting on decades.
It feels bad to invest right before the market crashes. I wouldn’t enjoy that. But I’m not worried about the value of my investments one month from now. I’m worried about where they’ll be in 20+ years.
Allowing short-term emotions — e.g. fear of an impending crash — to cloud long-term, math-based thinking is the nadir of result-oriented thinking. Don’t do it.
Don’t believe me? Here’s a fun idea. Google the term, “Should I invest at all-time highs?”
When I do that, I see articles written in 2016, 2017, 2018 … you get it. People have been asking this question for quite a while. All-time highs have happened before, and they beg the question of whether it’s smart to invest. So should you have invested in 2016? In 2017? In 2018? While those markets were at or near all-time highs, the resounding answer is YES! Investing in those all-time high markets was a smart thing to do.
Let’s go further back. Was investing at all-time highs back then a good idea? Investing at all-time highs is still a smart thing to do if you have a long-term plan.
Investing at all-time highs isn’t that hard when you have a long outlook.
But let’s look at some hard data and see how the numbers fall out.
Historical Backtest for Investing at All-Time Highs
There’s a well-written article at Of Dollars and Data that models what I’m about to do: Even God Couldn’t Beat Dollar-Cost Averaging.
But if you don’t have the time to crunch all that data, I’m going to describe the results of a simple investing back-test below.
First, I looked at a dollar-cost averager. This is someone who contributes a steady investment at a steady frequency, regardless of whether the market is at an all-time high or not. This is how I invest! And it might be how you invest via your 401(k). The example I’m going to use is someone who invests $100 every week.
Then I looked at an “all-time high avoider.” This is someone who refuses to buy stocks at all-time highs, saving their cash for a time when the stock market dips. They’ll take $100 each week and make a decision: if the market is at an all-time high, they’ll save the money for later. If the market isn’t at an all-time high, they’ll invest all their saved money.
The article from Of Dollars and Data goes one step further if you’re interested. It presents an omniscient investor who has perfect timing, only investing at the lowest points between two market highs. This person, author Nick Maggiulli comments, invests like God would: They have perfect knowledge of prior and future market values. If they realize that the market will be lower in the future, they save their money for that point in time.
What are the results?
The dollar-cost averager outperformed the all-time high avoider in 82% of all possible 30-year investing periods between 1928 and today. And the dollar-cost averager outperformed “God” in ~70% of the scenarios that Maggiulli analyzed.
How can the dollar-cost averager beat God, since God knows if there will be a better buying opportunity in the future?
Simple answer: dividends and compounding returns. Unless you have impeccable — perhaps supernatural — timing, leaving your money on the sidelines is a poor choice.
Investing at all-time highs is where smart money plays.
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