As we approach the all-time high on the S&P 500 (2,872.87 set on Jan. 26, 2018), I want to discuss one of my favorite client excuses for not wanting to invest in the stock market. In general, investors are extremely fearful of investing in a market that has reached an all-time high -- particularly if they have a lump sum of cash to invest. The media loves to harp on this fear as well because it sells news. I understand why clients are fearful during these times because it certainly coincides with the mantra “Buy Low, Sell High” they have heard all of their life.
There are two questions to address when looking to invest during these market conditions: 1) Should investors avoid markets at all-time highs; and 2) should investors dollar-cost average into this type of market?
Investing at All-Time Highs
Buying equities at an all-time high, especially a few weeks short of reaching the longest bull-run for the S&P 500 in history, can be nerve-wracking. However, data compiled by LPL Financial in 2017 (https://twitter.com/lplresearch/status/755121996640452608) shows that investors have a good chance of seeing another all-time high pretty soon after buying into a current one. LPL found that from the date of any previous all-time high for the S&P 500, the index hit another all-time high within one month 91% of the time. In addition, they found that there is a 97% chance you would hit another all-time high in 3 months and a 100% chance you would hit another high within one year.
This historical data certainly doesn’t mean that market highs are all created equal and that a correction might not be around the corner. But it does mean that putting off investing in the market due to an all-time high may be a recipe for missing out on market returns. It is also a primary reason most investors significantly underperform the index (see https://www.marketwatch.com/story/americans-are-still-terrible-at-investing-annual-study-once-again-shows-2017-10-19).
Dollar-Cost Averaging v. Lump Sum Investing
While dollar-cost averaging (DCA) can certainly help ease the fear of investing at the peak of a market, investing the lump sum now regardless of the market’s performance may be the best strategy. In 2012, Vanguard compared the historical performance of DCA to investing a lump-sum of cash (the whitepaper can be found here https://personal.vanguard.com/pdf/s315.pdf). Vanguard found that on average, investing a lump sum outperforms DCA two-thirds of the time. Vanguard concluded that if an investor is comfortable with their asset allocation and risk tolerance then the “prudent action” is to invest the lump sum immediately to gain exposure to the markets. Vanguard does acknowledge that there is an emotional component to this strategy. If minimizing downside risk is an important goal of the investor, then DCA could provide a benefit.
This is where working with a trusted advisor can really add value for an investor. An advisor can help you weigh the financial and emotional benefits of each strategy. It is also vital that you are working with an advisor that will help you stay in the market during turbulent times and keep the asset allocation you both chose to meet your goals.
Conclusion
The bottom line is that equities near or at all-time highs still offer long-term opportunity for investors. In addition, investing a lump-sum of cash into the markets is often the best strategy for reaching your long-term goals. Investors need a financial plan, an asset allocation to meet the goals outlined in that plan, and an advisor to help them implement it. If done properly and in conjunction with a trusted advisor, all-time highs should never sway you from investing for your future.
If you would like to discuss this topic or your financial situation, please reach out to us at GilesMcPhail Wealth Management.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.