Scared of investing when the stock market is at an all-time high? You shouldn’t be

Duncan Lamont

While many investors may feel nervous about the potential for a fall, our analysis of stock market returns since 1926 shows that investing at a new high can be profitable.

The US stock market hit a new all-time high in mid-December 2023 and has moved higher since. At the end of January, it was nearly 3% above the previous peak. This has left many investors feeling nervous about the potential for a fall.

Many also switched more of their investments to cash in 2023, attracted by the high rates on offer. The thought of investing that cash-on-the-sidelines when the stock market is at an all-time high feels uncomfortable. But should it?

The conclusion from our analysis of stock market returns since 1926 is unequivocable: no.

The market is actually at an all-time high more often than you might think. Of the 1,176 months since January 1926, the market was at an all-time high in 354 of them, 30% of the time.

And, on average, 12-month returns following an all-time high being hit have been better than at other times: 10.3% ahead of inflation compared with 8.6% when the market wasn’t at a high. Returns on a two-year or three-year horizon have been slightly better on average too (see Chart 1).

Chart 1: Average inflation-adjusted returns for US large cap equities per annum.

Differences compound over time

$100 invested in the US stock market in January 1926 would be worth $85,008 at the end of 2023 in inflation-adjusted terms, growth of 7.1% a year.* In contrast, a strategy which switched out of the market and into cash for the next month whenever the market hit an all-time high (and went back in again whenever it wasn’t at one) would only be worth $8,790 (see Chart 2). This is 90% lower! The return on this portfolio would have been 4.7% in inflation-adjusted terms. Over long time horizons, differences in returns can seriously add up.

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