It’s OK To Invest At All-Time Highs

Jason Demland

August 28, 2018

What goes up must come down right? Without fail, this is what our gut tells us when the market hits a record high. Everyone I talk to about investing remembers the financial crisis. Most of them remember the dotcom bubble too. Our survival instincts show up and shout at us about how much riskier it must be, like being invested at a record high is the same as standing on the top of the highest mountain and looking down. There’s only one way to go from the top, right?

Well, whenever emotions start getting all riled up it’s a good time to look at the facts and data to re-center in order to avoid some bad decision making.  

If you haven’t heard of the gambler’s fallacy it’s really a belief in the law of small numbers which causes people to make a decision based on a small sample-size of data that they think is a true representation of the larger data set; it’s the belief that things will eventually even out. Gamblers do this when they think they’re “due” for sevens on the slot machine because it hasn’t hit in a long time or that red will come up on the roulette wheel because it’s been black several times in a row. This is a false idea. Think about coin tosses. If I flip a coin there is a 50% chance of it being heads or tails.  Is it possible to flip a coin twice and get heads both times? Is it possible to flip that coin 25 times and get tails every time? Of course it is. What are the odds of getting tails on the 26th flip? 50/50. The past data plays no part in altering the next outcome. It has the same odds as every other coin flip. 

Just because there’s been a lot of good news since the 2008 bottom (it hasn’t been smooth though), doesn’t mean that we’re “due” for a correction or disaster. In fact, Michael Batnick at The Irrelevant Investor gave some interesting data back in November 2016 that applies today as well.

The table below shows that average returns six months and one year following an all-time high has been stronger compared with all other days.

 

New market highs aren’t a reason for concern in and of themselves. In fact, they can be indicators of new highs coming. It doesn’t feel awesome to invest when the markets are at their peak, but it may make sense to do just that.