Should I invest when the market is at a record high?

I’ve been hearing this sentiment a lot lately. “I don’t want to invest now when the market is at record highs”. Actually, I’ve heard that a lot before too. Do you know why I hear that so often? Because the market is very often at record highs. Let’s look at the last few years:‎

2013? Record high.‎
2014? Record high.‎
2015? Record high.‎
2016? Record high.‎
2017? Record high.‎
2018? Record high.‎
2019? Record high.‎
2020? Record high.‎

If you could go back in time and invest at the 2013 record high, would you? I hope so, because the market is up 139% since then.‎

To see how the market fares after record highs, I downloaded the historical S&P 500 stock market pricing going back to 1871. Since then we’ve had 298 months where a new record high was broken (About 17% of all months break the record). If you look at just those record high months, then see how the market performed in the following year it was pretty good. The average market return following a record high month is 11.2%. ‎

I think many people have an incorrect mental model of the stock market. Like it’s a yo-yo that just goes up and down. And to win you need to “buy low” then “sell high”. But that’s not the right model. The better model is a yo-yoer walking up stairs. There’s some short term volatility (the yo-yo) but you always want to be on the ride up the stairs. Waiting for a down “yo” might cause you to miss three or four stairs up and you’ll never actually see the market that low again.‎

And since we can’t know what the future holds, the better strategy is to get on that ride up the stairs as soon as possible, and just wait it out. That’s called investing early and often.‎

As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.‎


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