A well-diversified portfolio is enough to lessen the fear of a valuation-induced correction for some investors, but for others, the fear of losing money invested at a market high is another hurdle to clear. Although this is a rational and understandable fear, the evidence demonstrates that investors are best served by ignoring recent market performance. The timing around when to invest in the stock market should instead be governed by a holistic plan anchored to your goals that considers a wide range of potential market outcomes. At the beginning of each trading day, the expected return for stocks is positive, regardless of what happened the day before. Thus, it’s always a “good” time to invest for the long-term. And if today isn’t a good day to invest, when would you know the “right” day has arrived? Consider the following: From 1926-2019, the average annualized compound returns for the one-, three- and five-year periods after new market highs (using the S&P 500 as the benchmark) were, respectively, 13.9%, 10.5% and 9.9%. What’s more, bucking conventional thought, the returns for those same time periods following market declines of at least 10% were lower than the returns after market highs (at 11.3%, 10.2% and 9.6%).1 From this data we can conclude that trying to time an entry point for investing cash is futile.
When you decide to enter the market, evidence shows that deploying all your investable assets at once is a superior approach to spacing out the investment over time, a strategy known as dollar-cost averaging.1 Here is one way to think about this concept: If you chose to invest a portion of your cash immediately, and then space out the remaining investments, there now exists inherent tension in answering the question, “Now that you have invested a portion of your portfolio, would you rather that the stock market go up or down?”