There are a few days every year in the shopping calendar you can rely on to get a bargain – Black Friday, Cyber Monday, Boxing Day sales (singles day is also making an impact outside of China).
Thousands of hopeful shoppers log on, or line up, from the early hours knowing they’ll bag a bargain, at much less than full price.
We see similar behaviour in investing. There’s a tendency to wait until markets are ‘on sale’ to bag that bargain. The problem with this strategy is we never know when the next sale is coming up, or what the discount may be.
Also since markets generally trend upwards, there’s a chance the sale will never happen and you’ll end up buying even higher than today’s price!
Back in July 2019 we asked if Australian shares are expensive compared to history? We concluded that they were actually at long term historical average prices.
In this article we consider a different question: “should I invest when the market is high?“^
Should you fear investing when markets have never been higher?
Australia’s last all-time high happened in July 2019, when it eclipsed a 12 year wait (previously set on 1 November 2007) – one of the longest stretches on record.
Note: this doesn’t include effect of reinvesting dividends (which by definition would mean more frequent all time highs thanks to the power of compounding).
On 30 July 2019, the All Ordinaries Index reached 6928 points. We are now getting closer to a new high – we’re within 100 points! (as of 13 November 2019)
A lot of investors remember the months and years after the Financial Crisis in 2008/9, understandably they’re still shell shocked from the losses they made from what was a high point, and are reluctant to invest.
As a result, many Australians now sit on large amounts of cash, fearful of investing at the top of the market, yet only earning at best 2% interest on their money by keeping it in cash.
What does the data say?
Let’s look at the data over the last 30 years to see how you would have done if you’d invested whenever the market hit an all-time high.
Between 1989 and 2019 there were 359 days where the Australian share market reached a new all-time high.
If you had invested only on these 359 days you had about the same chance of a positive return compared if you had only invested on days when the market didn’t make an all time high.
| All time high | Not all time high | |
| Chance of positive return over next 12 months | 71% | 72% |
Historically when the share market has reached an all time high, the next 12 months have generated an average capital return of 6.5% (excluding dividends). What’s interesting is that this is higher than if you invested when the market was not at its peak!
That’s right, investing when the market is at an all-time high has historically delivered higher returns than investing when the market is not at an all-time high!
There’s similar studies in the USA dating back to the 1920’s that show buying when the share market is at an all-time high was actually a successful strategy.
All time highs leads to more all time highs
After a new all time high has been reached, the average number of days before the next one is 30 days. If you exclude the 12 year wait from 2007 to 2019, the average number of days is just 19!
In other words, the first all time high is usually followed by more of them. In 93% of instances, the next all time high was within the next month. The US share market has now made hundreds of all time highs since it first exceeded it’s pre-Financial Crisis peak in 2013.
There’s been only 4 times over the last 30 years where investors had to wait more than a year for a new all time high (the next highs came in May 1993, October 1996, April 2004, and July 2019).
In the first 3 of these cases (1993, 1996 and 2004) once a new high was reached the average capital return over the next 12 months was 20%. Next July we’ll know what the 12 month return is for this fourth time.
Markets are like an elastic band and the longer it takes to make a new high, the faster markets tend to climb after that new high is eventually reached.
| All time high | Time to make new high | 12 month capital return after new high |
| 12 January 1990 | 40 months (26 May 1993) | 22% |
| 3 February 1994 | 32 months (7 October 1996) | 18% |
| 7 March 2002 | 25 months (1 April 2004) | 20% |
| 1 November 2007 | 140 months (24 July 2019) | ? |
So what does this all mean for you?
Unlike shopping, it doesn’t pay to wait for a bargain when you invest. Historically investors that paid full price have done just as well as those who have invested at other times.
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.
Peter Lynch
The less time you focus on forecasting where the market is going, the better off you will be.
That’s why our advice is that the best time to invest in the market is regularly. The longer you remain invested, the better off you will benefit from the wonderful effect of compounding.
Even on the odd occasion that markets fall from an all-time high, you can rely on diversification and owning defensive assets that are not correlated to the share market (such as bonds and gold) to help keep you confidently invested.
If you are waiting for a “correction” in the market from an all-time high, you could potentially be missing out on years of good returns while you wait. Don’t worry about paying full price.
^ We’ve defined all time high as a day when the All Ordinaries index closes at an “all time” high. Note that the All Ordinaries Accumulation index would reach all time highs more often – however the results are similar.
