Should you invest when markets are at record highs?

That reaction is completely understandable. No one wants to invest just before a market fall, and it can feel sensible to wait for a better moment or take some money off the table after a strong period of growth.

The challenge is that market timing requires two difficult decisions: when to get out and when to get back in. Getting one of those decisions right is hard enough but getting both right repeatedly over a lifetime of investing is much harder still.

A more useful way to think about markets is that today’s prices already reflect the views of millions of investors around the world. Markets are not perfect, and they will fall from time to time, but trying to outguess the combined judgement of all those investors is unlikely to be a reliable long-term strategy.

It is also worth remembering that all-time highs are not unusual. If markets are expected to grow over the long term, then new highs should happen along the way. Since 1972, developed stock markets have reached new highs more than 1,000 times.

Figure 1: Develop stock market returns and all-time highs, Jan-72 to May-26

Source: Albion Developed Stock Market Research Index, Jan-72 to May-26, daily returns in GBP, for illustrative purposes only.

A headline saying “markets hit an all-time high” should not automatically be seen as a warning sign. In many ways, it is simply part of how long-term investing works.

Research from JP Morgan looked at investing in the S&P 500, which represents 500 of the largest companies in the US. It found that investing at market highs did not lead to worse average outcomes than investing on a randomly chosen day.

In that research, investing on a randomly selected day led to a positive return over the next 12 months 83% of the time. Investing on the day of an all-time high led to a positive 12-month return 88% of the time. Average returns were also higher over 1, 3 and 5 years when investing at market highs.

Of course, this does not guarantee what will happen next. Markets can and will fall at times, but the research shows that a market high, on its own, is not a reliable signal that a fall is imminent.

Market falls are already factored into sensible financial planning. They are uncomfortable when they happen, but they are not unexpected. The important point is that stock markets reaching a new high does not tell us when the next fall will arrive.

The takeaway: stay invested, stay diversified, and keep focused on the long term.