Riding high: Should you invest when stock market prices are high?

Markets fell sharply in March 2020, at the start of the pandemic, but like as with most severe market sell-offs, a relatively quick stock market recovery ensued.

Even though a number of stock markets (including the US stock market) are hovering around all-time highs, it doesn’t mean you should put off investing.

If you timed things well and invested when the market was low, you may be hesitant to invest now, with market prices so much higher. While it’s true that one well-known investment rule is to buy low and sell high, it’s not always the best idea to avoid buying into the market.

Read on to see what to do if you have cash to invest when the market is strong.

Play the long game

Time in the market rather than timing the market is the key message. Investing in stocks and shares with a short-term time horizon is risky business. However, investing with a long-term view based on your objectives and risk tolerance rather than short-term market moves is a far more sensible approach.

If you’re sitting on cash you want to invest, watching a stock market rise as you wait to make your move can be uncomfortable. This hesitancy to act is completely understandable but your behaviour could lead you to become a speculator.

What you really want to be is a committed investor. This approach will mean you are less affected by market conditions because you make decisions with a long-term view.

In today’s environment, markets will always be volatile over the short term as investor sentiment is driven by the here and now. Trying to time this is almost impossible, even for the most seasoned professionals and therefore there is always a significant degree of speculation involved. Meanwhile, investing for the long term requires a well thought out strategy, skill and a degree of patience. Quality investments are driven not by speculation but by key investment fundamentals.

Make your money work

If you fail to put your money into the market, you will inevitably miss out on market returns. By holding back until the market has reached a level where you feel comfortable to act, you could come to regret not putting your money to work sooner. To offer a good example, over the past 5 years markets have been very volatile and there has always been speculation about how overpriced markets might be. During the 5 years, there have only been 3 calendar quarters where markets have actually fallen (finished the quarter lower than where they started). i.e. 85% of the time, markets have been rising.

Holding your money in cash might seem like a safe option, especially if you’re waiting for the right time to invest, but we would argue, holding cash is more of a risk, especially in today’s environment.

With inflation on the rise, your purchasing power is significantly reduced. This problem only gets worse if you hold on to cash over the long term.

The Bank of England (BoE) is expecting inflation to be sustained at 5% over the next 12 months. I.e. £100 today might only be worth £95 in 12 months’ time if the BoE prediction is correct.

Therefore, by putting off investing today, you are almost guaranteed to lose money as the value of your cash erodes. To compound the issue, you could be missing out on solid market returns.

It’s all about time in the market

Instead of trying to time the market, think about giving yourself the most time invested in the market.

Some of the worst days in the market are often followed by the best shortly after.

At times, it can be a rocky ride but that’s why the long-term view always wins out – unfortunately, you can’t enjoy the highs without experiencing a few uncomfortable lows.

Impact of missing the best 10 days in the UK stock market

The chart below illustrates the effect on investments that missed the best 10 days in the UK stock market between 2000 and 2020, with dividends reinvested.

Remember, past performance isn’t a guide to future returns.

Source: Lipper IM, from 03/01/2000 to 31/12/2020. Figures based on starting investment of £10,000.

This chart is a clear indicator of how much growth you can miss out on if you’re not in the market on the best days.

An investor who stayed the course ended up with £23,171.83 at the end of the 20-year period. This is £11,668.88 more than the poor investor who missed out on the best 10 days in the market.

You never know which way the market will move from one day to the next but invest for the long term and short-term fluctuations matter less.

Take things in your stride

Rather than reacting to the market and treating record highs with excitement or alarm, you should take things in your stride.

When Dimensional explored the topic of investors’ reactions to record highs, they looked at the S&P 500 Index over a 94-year period ending in 2020. The Index produced record highs in more than 30% of the months they observed.

They also revealed that purchasing shares at all-time highs has, on average, generated similar returns over subsequent one-, three-, and five-year periods to those of a strategy that purchases stocks following a sharp decline.

The table below shows the average annualised returns for S&P 500 Index after market highs and declines.

When it may be best not to invest

Warren Buffett famously said that investors should “Be fearful when others are greedy and greedy when others are fearful”.

The dot-com bubble is a classic example of this.

During the dot-com bubble, stock markets rose rapidly for years, but many investors put in their money at all-time highs and painfully lost out when the bubble burst. The burst happened when company valuations got silly and became detached from reality.

Understanding what areas of the market are overheated is important since understanding what represents good value in an investment is vital. This requires fundamental analysis beyond what most people would have time or capacity to be able to evaluate alone.

Therefore, we would encourage you to invest in an established fund managed by professionals who practice due care, skill and diligence when managing money and whose interests are aligned with yours.

To find out more about how we can help you invest your money wisely, so you profit from expert insight and long-term growth, email enquiries@bowmoream.com or call us on 0203 617 9206.

Please note

The value of your investments can go down as well as up, so you could get back less than you invested.

Past performance is not a guide to future performance.

Bowmore Asset Management Ltd is authorised and regulated by the FCA.

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