If you’ve been following the stock market lately, or have heard on the news, it’s been at or near an all-time high just about every week.
It can be scary to invest when something has been doing very well! I get it flashbacks to investing right around the 2006 recession, buying a house right before the housing crisis, or putting all your money into the markets back in 1929 before the great depression.
Let’s face it, these are all moments in time when it would have sucked to invest. There’s no way to get around that. There are times when it’s just not great to have started investing.
No one can say for sure when the next big market correction will happen, or even why it will happen. People are constantly predicting the next big recession. Some may end up being right, but most will be wrong.
Since we are at, or near, an all-time high for the stock market, you might be thinking that means a correction is more likely now. It turns out that’s not at all the case! Let’s dig into why that is.
Here’s a look at the performance of the S&P 500 Index fund we looked at before – $VFIAX – over the last 10 years on Morningstar. This has been a bull market.
Fun side note: a bull market means the market is going up because when a bull is attacking its horns will go up. A bear market means the market is going down because bears swipe down.
If you pick just about any peak on this chart, it was an all-time high for the time.
(show examples of dates that were all-time highs)
If we shift this back a few years and look at a bear market, it’s not as clear cut. There were all-time highs here, but the market dropped. It eventually recovered though.
When I was first learning to invest, one thing that I kept stressing out about was the idea that I didn’t know if we were in a period where the market was about to fall or about to rise. Because of that, I didn’t invest because I was scared about losing money.
Here’s the thing though: there’s no way of knowing – ever. Even if you think the markets are going to collapse and drop in value, how will know when they’ve dropped “enough” and it’s time to invest? You have to be right twice – that the markets going to drop and that it’s done dropping in value.
One of the best analyses of this idea that I’ve come across is this visualization by Engaging Data. That shows what it’s like to invest when the market is at an all-time high. This takes into account 17,000+ instances of investing when the market has been at an all-time high and looking at what the value of that investment would be months or years later.
The left side of the chart are cases where your investment would have lost money after 1 month, with the right side shows cases where your investment would have grown.
The mean growth after 1-month when investing at an all-time high is 0.71% – not bad for one month!
If we take this out to 1 year, it looks even better, with a mean return of 8.79%. Remember the 8.6% return from $VTIAX we looked at earlier? This matches up with that – even when investing while the market is at an all-time high.
At the 5 year mark, the mean growth is up to 50%. In other words, $10,000 would have grown to $15,000. The number of cases where an investment would have lost value over 5 years is getting smaller and smaller.
At 10 years after the investment, there are even fewer times when you’d lose money. The mean returns after 10 years shoot up to 114% – growing $10,000 to $21,400 during that time-frame.
What’s most interesting to me about the behavior of the stock markets is that MOST of the time the markets have been near an all-time high!
(show market percent near all-time high from Engaging Data)
As a matter of fact, 37% of the time stock markets have been within 1% of their all-time high. An additional 19% of the time markets were within 5% of their all-time high.
That means 56% of the time markets are within 5% of their peaks!
Since 2012, after the markets recovered from the great recession, there have only been a few days where the markets were farther than 5% away from their all-time high. If you were waiting for them to dip to buy you would have missed years of growth.
Don’t let the market being at or near an all-time high scare you away from investing. It’s normal and healthy for a market to be at or near an all-time high. There’s no guarantee the market will go up in value whether it’s near an all-time high or not, but at least it hasn’t historically meant that the market is going to drop either.
Ok, takeaway time. Here are a few things to remember market timing.
#1 – It’s impossible to know when the next recession will hit, but you can 100% assume there will be another recession. Stocks might double, or triple before the next recession, or they might drop tomorrow. Just because the market has climbed higher lately, don’t assume that means that the market is going to drop.
#2 – It’s absolutely normal for the market to be at or near its all-time high. Over the last 70 years, the S&P 500 index has spent 37% of its time within 1% of its all-time high. It’s spent 56% of the time within 5% of its all-time high!
#3 – Over a 10 year period, the median return of the S&P 500 has been around 10% a year. Even though that mostly meant investing in the S&P 500 when it was within 5% of its all-time high, when you look forward 10 years it’ll usually mean a 10% gain.
One of my favorite Bogle quotes is about market timing.
“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.”
― John C. Bogle, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns, 10th Anniversary Edition
Market timing, or trying to buy or sell based on market behavior, trys to put patterns to past behavior to predict future performance. If that were possible, fund managers would be a thousand times more rich. No one can predict the future. What we can do is invest in countries that have strong economies. As long as those economies grow, if we’re invested in the stock market we’ll share in some of that growth.
In the next lesson, we’ll take a look at the 7 most common mistakes people make when investing. We’ve gone over some of these already, but it’s good to know these to help you avoid them.