Should You Invest (Or Wait) When The Stock Market Is At An All-Time-High?

An excellent post and and model to explore the question of Invest at market highs or wait.

Should You Invest (Or Wait) When The Stock Market Is At An All-Time-High? - Engaging Data

Some people might be suprised at what the data sugests. (US Data)

 

The mathematics is that the market on average increases more than it decreases and thus it's always better to be invested.

People's fear makes it difficult to go all in knowing it is "possible" to drop 90%, forgetting it's also "possible" to continue up another 90%.

 

"The market is overvalued so I'm not going to buy now"
or
"The market is crashing, so I'm not going to buy now"

Unless you know something that everyone else doesn't, better just to buy in.

I think Vanguard released a report comparing the difference between DCA'ing versus buying once a year, and they came to a similar conclusion. Buying one big parcel puts you in the market for a longer time, so it's better off than buying smaller chunks more often.

*EDIT* Here it is:
https://personal.vanguard.com/pdf/s315.pdf

 

Great site thanks.

Hard to disagree with the data provided on when to invest. Trouble is like most of these things it comes down to investor’s emotions.

DCA is generally fine regardless of market highs but “lump sum” investing should the market take a nasty turn soon after investing it can be devastating for some investors depending on their level of regret. Data suggests to invest immediately is generally best in the long run but humans aren’t Machines. If regret related emotions take over then that’s when investors are more likely to do stupid things like turn a temporary loss into a permanent one! Or perhaps this is indicative of someone who shouldn’t be in Shares in the first place?

I suppose one might consider some scenarios. Say an investor receives a financial windfall. Soon after investing this lump sum the market might go up 100% in coming years or the market might fall 50% plus and stay down for many years. Which of these alternatives would cause the greatest amount of regret?

Also other than psychology the investor’s stage of life will play an important role so it’s never easy when trying to make a decision when dealing with lump sums.

 

Game theory (best strategy based on statistics) for long-term investors is buy as soon as you get the money. In that context, DCA is buying as the money becomes available riding market highs and lows.

The market could drop 90% tomorrow, but it may not. As @Nodrog explains, investor psychology is at play here. If you play 3 Aces in poker and lose, you can't regret and let it influence future bad decision making. Just keep making the best decisions and hope that some luck comes your way.

One important consideration is proper risk management. If your entire net worth was $1M in cash to invest, the allocation should be very different if you were retiring tomorrow or in 30 years. Investing 100% equities on the day before retirement would be disastrous if the market immediately dropped 80%, because it would force you to sell at the worst possible time. In that case, it makes sense to reduce risk (volatility / beta) by holding cash / bonds based on your risk appetite - that is, "how much are you willing to lose?". On the day of retirement, that could be calculated (based on how much you spend) at 50%, in which case you could invest close to 50% in bonds. Alternatively, if the money was not required for 30 years, an 100% investment in equities may make sense for some people with a higher risk appetite.

Bernstein eloquently (in a link posted on here recently) explained that risk appetite is analogous to how much a 50% chance at winning $1 is worth to you. If you'd accept a guaranteed 20 cents instead of the coin toss, your risk appetite is lower than someone who would only accept 50 cents, aka the gambler.

Not licensed to give advice.

 

Great points and reinforces what I was getting at. DCA is a no brainer most of the time but lump summing into the market does come with a number of qualifiers. I’m sure @dunno knows all these possibilities more than anybody but was providing a link to an excellent article with supporting data showing the futility of timing. The evidence supports investing straight away as the base case. Then as usual the investor needs to understand themselves and their circumstances then modify accordingly.

Sometimes young accumulators respond worse to negative market events more so than retirees due to not having experienced such an event before. So their “actual” risk tolerance may be very different to their “perceived” risk tolerance. Which is why to the confusion of some the likes of Bernstein suggest even young accumulators be a bit cautious and still hold some bonds until they experience their first major market downturn. Only then will they better understand their true risk tolerance.

 

I still think we are just at the start of the new Bull Run..

 

So the Dow drops 1.5% last night and the ASX refuses to bow down. At least the stocks I'm looking to buy.

 

It can be tough. Did the S&P500 or the Russell 2000 drop as much? I think they are considered a broader reflection of the US market. As far as I know the DOW consists of only about 30 stocks - although they're bloody big ones.

I reduced my active interest by quite an extent over the last five or so years in looking at those things.

The déjà keeps on vuing. I know, so no need to point out it's crap grammar.

 

To answer the original question......as many have said be an investor by habit all the time in regular amounts but mostly when the market falls heavily. Learning how to recognise & measure market retracement patterns and interpret other clues in the market and find lows accurately is your best weapon as an accumulator.

 

Looking at the US Market its risen every year from 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017..no one knows the future of 2018 but we're getting close o end of year

An investor who started investing in 2009 would be none the wiser on a crash or correction, such market bull runs as above aren't normal , on average the US market falls 1 out of every 3 years

If you're a collector of stocks and not yet retired, celebrate any corrections or crashes as you accumulate bargains Only retirees (or near-retirees) should be excited to see the bull roar

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