I think this short but important article from our friends at Dimensional highlights perfectly the answer to a timeless and ubiquitous question that so many of us have regarding timing: that is “when to invest versus when to hold back”. In sum, the simple chart below illustrates that it’s rarely a good time to “hold back”.

Many investors may think a market high is a signal stocks are overvalued or have reached a ceiling. But they may be surprised to find out that the average returns for the S&P 500 Index one, three, and five years after a new market high are similar to the average returns for the index over any one-, three-, or five-year period.

In looking at all 1,000-plus monthly closing levels between 1926 and 2020 for the S&P 500 Index, 30% of the monthly observations were new market highs. After those highs, the average annualized compound returns ranged from nearly 14% one year later to just under 10% five years later. Those results were close to average returns over any given period of the same length. When viewed in terms of the index simply having risen or fallen, the S&P 500 was higher a year after notching a record 82% of the time, and 78% of the time after five years.

Past performance is no guarantee of future results. Performance may increase or decrease as a result of currency fluctuations.

History shows that reaching a new high doesn’t mean the market will then retreat. In fact, stocks are priced to deliver a positive expected return for investors every day, so reaching record highs with some regularity is exactly the outcome one would expect.