Is It Bad To Invest When Prices Are High?

Is It Bad To Invest When Prices Are High?

The S&P 500 just set a new high last week as of this writing. It’s up over 26% so far this year. And that’s on top of a 16% rise in 2020 and a nearly 29% jump in 2019. It’s completely understandable that investors would question whether they should remain in the stock market, let alone allocate more of their savings to it, when stock prices are so high. Wouldn’t it make more sense to get out now while your savings are at a peak?

The simple answer is “no.” Let’s start with basic logic. The S&P 500 set a new high over fifty times earlier this year. So the first question to ask yourself is: if you didn’t choose to exit the market on one of the previous days when a new high was reached, why should you do it now?

We invest in the stock market precisely because of its growth prospects. Investors get to share in the success of over 3,000 operating companies in the U.S. and more than 12,000 worldwide through stock ownership. The price of that ownership fluctuates based on company performance and investor sentiment. While both factors are impossible to predict in the short-term, longer term we would expect both to increase as the world grows and economic performance follows suit. You can mitigate the risk of adding new money through dollar cost averaging but there’s no way to know in advance the timing of the ups and downs.

If that isn’t enough to still your qualms about adding to your equity positions when stocks are highly valued, some data unearthed by Weston Wellington at Dimensional Fund Advisors might help. He found that over the past 94 years, the average one-year gain of the S&P 500 after setting a new monthly high was 13.9%. Even more interesting: over the same period, the average one-year gain after a 20% market decline was only 11.6%. In other words, you’d have done better investing when the stock market was doing well than after a crash.

The same turned out to be true for longer periods as well – market returns after new highs were better over three-year and five-year periods than after lows – although the difference between the two was much narrower.

Is there ever a bad time to invest? Not if the purpose is to grow your savings to fund your future lifestyle and goals after you are no longer earning a living. We cannot know what the future will bring, but the stock market until now has been shown to be a consistent source of growth above inflation. That’s one of the most important factors in ensuring that you don’t run out of money due to loss of purchasing power. If you’re currently invested in the stock market there’s no reason to exit right now. And if you’re not, there’s no better time to start.

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