Investing at the Top of the Market?

Considerations for when Capital Markets Appear Expensive

The S&P 500 is trading at, or near, all-time highs (depending on when you read this), and that has some people wondering how to invest their assets when everything looks overpriced. This is a common thought, but tends to lead to behavioral error and can interfere with long-term gains. Here are some ideas to consider that may enlighten, alleviate fear, and help you invest your assets more effectively over the long term.

Is Trying to "Time" the Market a Good Idea?

Whether you’re trying to identify the top or bottom of a market, you are attempting to time the market. The truth is that nobody knows when the top or bottom is going to be, much less pinpoint it with any reliable accuracy. The top of a market may look like a top until it roars upwards, and the bottom looks reliable until the correction continues. The point is that we don’t reliably know which direction things are headed, particularly in the short term, but we do have some data that suggests market timing is ineffective, and procrastination hurts long-term growth.¹

When Will the Top of the Market Happen?

This idea is more difficult to comprehend but provides some possible relief to those who think they are purchasing at the top of the market. One caveat though, this idea is based on longer-term investors who take advantage of historical market trends. Looking at S&P 500 gains/losses on a daily or weekly basis shows a chart of jagged lines moving up and down. The volatility in the short term can be visually jarring. Take the same S&P 500 and access data over 10 years and that volatility begins to “smoothen” and the overall trend of the market becomes more apparent. In the 20 years between 2003 and 2023, the S&P 500 returned an average of 10.20%, or 7.55% if you adjust for inflation.² And while the market had its ups and downs during this period, the trend line was steadily positive. That trend line depicts a market that is constantly rising and therefore tends to be at an all-time high.

When is the Best Time to Invest my Money?

If we understand the above, and have a long-term investment horizon, then the sooner you get assets invested the better. Overthinking the ups and downs can delay this, and if we agree that the long-term trend of growth found within the broader equities market will continue as it has, then the sooner we expose our assets to that the better. We want those additional days, months, and years to take advantage of compound interest effects.

Overall, we are trying to take a long-term view of wealth creation and understand that capital markets tend to rise over time. For those of us who are comfortable with a longer time horizon, these considerations can provide some comfort when assessing whether to invest now or wait until markets drop. Understanding one’s goals, risk tolerance, and individual situation is important, but so too is allaying some of the common misconceptions concerning equity markets.

1. Pasani, B. (2023, November 8). Why market timing doesn’t work: S&P 500 is up 14% this year, but just 8 days explain the gains. Cnbc.com. Retrieved February 13, 2024, from https://www.cnbc.com/2023/11/08/market-timing-doesnt-work-sp-500-14percent-rally-explained-by-just-8-days.html
2. Webster, I. (n.d.). Stock market returns between 2003 and 2023. OfficialData.org. Retrieved February 13, 2024, from https://www.officialdata.org/us/stocks/s-p-500/2003#:~:text=S%26P%20500%3A%20%24100%20in%202003%20%E2%86%92%20%24744.98%20in%202023&text=This%20is%20a%20return%20on,%2C%20or%207.55%25%20per%20year.