This age-old market-timing predicament appeals to both reason and natural emotional biases. Emotionally, when you buy anything, it feels good to get a “good deal” and buying after large market run ups may not feel like a “good deal”. From a more rational standpoint, it is incredibly disadvantageous to one’s financial future to invest at historic market tops such as those we saw in the Dotcom bubble and 2008. While these historic events are certainly painful outliers, both data and market mechanics support investing at new highs or rather not “waiting for a better price.”
Source: FactSet, J.P Morgan Private Bank, as of 8/27/20
Even if we ignore the opportunity cost of staying out of the market and waiting for a “dip”, market pullbacks aren’t necessarily guaranteed buying opportunities. Obviously if you buy at a cheaper price, you’ll have better returns all else equal. However, over the past quarter century, “buying the dip” hasn’t paid over the following year. Not to mention, emotionally, how does one make this timing decision of buying the dip—how big a dip will be required? How does one know if the dip will or will not turn into something much worse?
As outlined below, over the last 25 years, we see that investing at ATHs has actually been indicative of the best performance over the following year, while buying after a 10% or greater pullback has produced the worst performance. Perhaps most notably, by one measure ATHs have represented the safest time to invest with the worst 10% of one year periods after ATHs showing far smaller losses than in the other two scenarios.
Source: Koyfin, Beaumont Capital Management (BCM). Data for the period 6/28/1996 through 6/28/21.
Ultimately, investors should not be fearful of investing at All-Time-Highs. Given that any equity investment comes with an implied return, being uninvested can be particularly painful—the market has always recovered from a drawdown but if you forego investing at an ATH, there is no assurance you’ll ever see a cheaper price. In addition, a good tactical strategy can further mitigate the strain on your portfolio (and your mind) when trying to invest in any market situation, given their ability to quickly increase or decrease risk as opportunities present themselves.
References
- 1. Capital Group Time, Not Timing, Is What Matters
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David M. Haviland a Managing Partner of the firm and Lead Portfolio Manager of Beaumont Capital Management (BCM). Check out his full bio here.
