Following a steep drop in April, the US stock market recently soared to new all-time highs.
At the end of August, the S&P 500 was up 2% and the Dow Jones was up 3%. And both indices recorded their fourth consecutive month of gains. Meanwhile, the Nasdaq was up 1% – marking the fifth in a row of monthly rises.
While the US stock market is enjoying a run of recent highs, it doesn’t mean you should put off investing.
This is especially true as the market is at an “all-time high” more often than you might think: Since January 1926, the market has been at an all-time high 31% of the time (363 months out of 1,187).
If you tend to invest when the market is low, you may be hesitant to proceed when market prices are higher. Yet, 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 discover how you could capitalise by investing when the market is strong.
Play the long game
As a sensible investor, you should invest in stocks and shares with a long-term view based on your goals and risk tolerance rather than short-term market moves.
If you’re sitting on cash you’d like to invest, watching a stock market rise as you wait to make your move can be uncomfortable. Feeling hesitant 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, making decisions with a long-term view.
Day-to-day valuations are shaped by headlines and investor sentiment. So, viewed over the short term, markets are volatile.
Meanwhile, investing for the long term requires patience and skill; investments are driven not by speculation but by good business practice and valuations.
Put your money to work
If you fail to put your money into the market, you won't be ready to take the gains when they come.
In fact, if you hold back until the market has reached a level where you feel comfortable to act, you may regret not putting your money to work sooner.
Holding your money in cash might seem like a safe option, especially if you’re waiting for the right time to invest, but holding cash presents its own risk.
Over the long term, inflation can significantly reduce the spending power of your cash.
When Schroders reviewed almost 100 years of historical data, they found that investing in stocks and shares had a higher percentage chance of beating inflation than cash – over both the short and long term.
The likelihood of investments outperforming inflation reached almost 90% over 10 years, as shown in the below chart.
Source: Schroders
So, the longer you invest, the greater the chance that you’ll beat inflation.
According to Schroders, the likelihood of stock market investments beating inflation reaches 100% when you invest for 20 years or more.
If you delay and wait for the “right time” to invest, you could end up missing out on potential returns while the value of your cash erodes.
Forget trying to time the market – time in the market matters most
Instead of trying to time the market, think about giving yourself the most time invested in the market.
Aside from protecting your wealth from inflation, you could also profit from valuable compound growth.
To illustrate, if you had invested $100 in 1927, by the end of 2024, you could have accrued $103,294 (adjusted for inflation and with 7.3% annual growth).
However, if you’d invested the same $100 and switched to cash whenever the market hit an all-time high (buying back in whenever it wasn’t at a high) your “investment” would only be worth $9,922 – a whopping 90% lower!
The chart below shows the results in graphic detail.
Source: Schroders
Given that some of the worst days in the market are often followed by the best shortly after, investing can sometimes be a rocky ride – but that’s why the long-term view typically wins out.
Unfortunately, you can’t enjoy the highs without experiencing a few uncomfortable lows.
Know 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”.
Wise words from one of the world’s greatest investors shouldn’t be ignored!
Read more: 5 key investment lessons Warren Buffett has shared during his incredible 60-year career
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 bubble burst when company valuations became silly and detached from reality.
Don’t invest in a share at any price.
Even if you intend to invest for decades, it's still vital to do your research. Better still, seek advice from an expert financial planner.
At Ascenta Wealth, we create and manage your portfolio based on what you want in life. We can help you invest your money wisely, so you profit from expert insight and long-term growth.
