Should you ever buy a stock or index at an all-time high?

Note: This is marketing material. This article is not investment advice, capital is at risk.

When is the best time to buy a stock? It’s a question that we get asked a lot but there never really a clear answer. When it’s cheap? That makes sense, I guess, but how do you judge a cheap stock? Maybe it’s undervalued, maybe it’s cheap for a reason. Many an investor has found the value trap hard to escape and break even.

Should you buy when stocks or indices are at all-time highs? This might be considered buying something that is ‘expensive’. When a stock or an index is at an all-time high, we often refer to ‘psychological barriers to entry’ - people get scared because it’s never been this high before and looks pricey as a result. Investors instinctively want to wait until it’s trading a little or a lot cheaper. 

But this way of thinking is closely linked to trying to time the market – something that even seasoned professionals agree is almost impossible to get right.

Sometimes you need to reverse your thinking and look at the percentages. Momentum strategies are not based on nothing.

Last year, RBC Global Asset Management looked at the 1,250 all-time highs for the S&P 500 since 1950 and found something interesting – buying the top worked. Indiscriminate buying of the index delivered average 5yr returns of 11.3%, compared to 10.3% for ‘buying the top’. In other words, your returns would be close to the average return – and they found this was similar across the 1yr and 3yr horizons too.

Scottish Widows also did some research on ATHs for the S&P 500 going back to 1926. Notably, the investment manager found 12-month returns following an all-time high were better than at other times: 10.3% ahead of inflation compared with 8.6% when not after an ATH.

Investing when a stock has hit an ATH is linked closely to momentum strategies. A famous 1993 study published in the Journal of Finance showed trading strategies that buy past winners and sell past losers realised “significant abnormal returns” over the 1965 to 1989 period. For example, the strategy which selects stocks based on their past 6-month returns and holds them for 6 months realised a compounded excess return of 12.01% per year on average.

It’s normal to be nervous when markets hit ATHs – but the stats suggest staying invested, and perhaps adding to winning positions, can work.

Key Takeaways

• Staying invested and putting money to work regularly pays off

• Trying to time the market usually misses out on some of the biggest gains

• All-time highs are associated with positive earnings growth, economic expansion and momentum