Markets at all-time highs: should we invest?

When we receive a significant sum of funds to invest, whether from the sale of a business, a bonus, the sale of a property, an inheritance or another liquidity event, we face the question of whether to invest it all at once or wait for a “better moment.” This dilemma is particularly exacerbated when valuations are high and there is exchange-rate volatility. We hear that “the market has to correct,” that “the dollar will keep falling” and other sayings that fill us with doubts and distrust.

The empirical evidence is very compelling on this point: if we study the last 50 years of history, on 67% of days it would have been better to invest all at once versus investing in a phased manner. It's intuitive to believe this doesn't apply to scenarios in which we are at valuations close to all-time highs, believing that “everything that goes up has to come down.” In this regard, the data indicate that one in three highs reached serves as a floor for new highs. If we analyze the U.S. stock market from 1970 to date, on average investing on the days when there is an all-time high delivers future returns statistically equivalent to doing so on a day that isn't.

That said, investors' preferences can be as diverse as their own nature, and it's reasonable that someone is not comfortable with the possibility of investing everything and facing a sharp reversal, even though statistically it isn't the most likely outcome. In that case, the recommendation is to apply the investment process systematically and with discipline over a reasonable period of time to minimize the opportunity cost.

What is not advisable for structural, long-term portfolios is to stay in cash or liquidity waiting for a big correction that might never come. Much more important than trying to pick the moment is structuring a suitable portfolio compatible with the sought investment horizon. The longer the term, the less relevant the moment and the more relevant the time spent in the market.

Written by Juan Martín Llovet Echeverrigaray – Senior Wealth Advisor at Abaqus

Original publication in El Mercurio Inversiones