"Should I keep investing when markets are at all-time highs?" This is a question our Investment Advisors get asked a lot. While hesitation is natural, and a level of uncertainty is always present in markets, understanding the behavioural aspects of successful long-term investors can shed light on why you should keep investing, despite markets being at all-time highs. This article delves into 6 reasons why investing at all-time highs is sensible.
1. Loss Aversion is Often Misguided Thinking
Loss aversion, a concept from Behavioural Finance (the psychology behind investing), underscores how investors prioritise avoiding losses over maximising gains, leading to apprehension about investing at peak levels. While rational, this apprehension overlooks the fundamental fact that Australian and US share markets have gone up on average around 10% per year, and have posted gains in the last 4 out of 5 years. The BlueRock Investments model equity portfolio has returned around 11% per year since its inception in 2016.
It’s the power of compounding those positive long term returns that’s only possible if investors are participating in the market at all time highs.
2. The Myth of Timing the Market
Attempting to time the market by avoiding all-time highs and waiting for lower entry points is often futile. Historical data dating back to 1950 illustrates that the US equity market has reached over 1,130 all-time highs, averaging more than 16 annually. By fixating on market timing, investors risk missing out on significant growth opportunities.
This is one reason why we advise clients to keep their funds invested for a minimum of 5 years for share market focused portfolios..
2. Staying Invested
All-time highs often coincide with periods of robust economic growth and corporate profitability. While market downturns are a fact of life, the long-term trajectory of markets is upward, fuelled by productivity enhancements, innovation and inflation. Investing at peak levels aligns investors with this long-term growth momentum, positioning them to capitalise on future market advances.
Our objective with client portfolios is to grow the value of assets over the long term through regular portfolio reviews, careful investment selection, and meticulous performance and tax reporting services. We generally favour staying invested given the upward trend in markets despite the regular bearish media commentary.
3. Diversification and Risk Management
Allocating investments across various asset classes and sectors helps mitigate risk. If your portfolio is diverse and you invest in a company at an all-time high, diversity shields you from any sector or asset specific downturn. With a diversified portfolio and a long term view, you can be confident to continue investing during market peaks.
Adjusting portfolio volatility to suit risk tolerance, when initially investing, is another strategy to provide confidence to keep investing. We work with clients over the long term to monitor their comfort with market movements rather than just relying on an initial risk survey. These won’t always match the emotional journey of investors when real world events transpire.
4. The Reality of Market Corrections
Contrary to common belief, significant market corrections following all-time highs are rare occurrences. Analysis reveals that an annual loss exceeding 10% occurs approximately only one year out of fifteen after reaching peak levels. Over extended time horizons, such as ten years, having a loss after being invested at an all time high has been extremely rare.
Like we said, staying invested and adhering to long-term financial plans, while ignoring short-term fluctuations, is a trait of successful investors.
5. Historical Performance and Future Outlook
Historical data demonstrates that investing at all-time highs yields favourable returns over various timeframes. Despite initial apprehensions, investors who entered the market at peak levels have historically achieved returns close to the long-term average. Additionally, the likelihood of positive returns in the years following all-time highs is high, reinforcing the notion that market peaks are not indicative of impending downturns.
Keep Calm and Keep Investing
It’s easy to see why investing at all-time highs may evoke apprehension, but it shouldn't deter you from investing. By maintaining a long-term view and adhering to proven investment principles such as diversification and compounding year over year, you can invest with confidence. As legendary investor Peter Lynch says, "More money has been lost trying to anticipate and protect from corrections than actually in them."
If you need help to manage your investments and reach your goals, we’re here to get you there by ensuring you’re making intelligent financial decisions. Our tailored approach is supported by decades of advisor experience and backed by leading independent research provider Sandstone Insights. Through disciplined investing with a long-term view, we grow wealth without exposing you to unnecessary risk or excessive fees. Get in touch with our team and start investing with confidence (all-time high or not) today.
Disclaimer: The information in this article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.
