Week 30 Day 4: What If You Only Invested at Market Highs?

It sounds crazy: what if you invested ONLY on days when the S&P 500 hit an all-time high? You would still have made money -- a lot of it. That is because all-time highs are followed by more all-time highs about 70% of the time within 12 months. Today's 'peak' is usually tomorrow's 'bargain.'

The data on investing at all-time highs (S&P 500, 1950-2023): The S&P 500 has set approximately 1,200 all-time highs since 1950. After each all-time high, the forward 12-month return has averaged approximately 11.2% (compared to approximately 11.6% for all periods). There is virtually no return penalty for buying at all-time highs. Why it works: the market spends most of its time near or at all-time highs because it trends upward over time. From 1950-2023, the S&P 500 closed at an all-time high approximately 8-10% of trading days. Being afraid to invest at highs means you are avoiding investing approximately 10% of the time -- precisely the 10% that leads to the strongest forward returns (because price strength tends to persist). The comparison: Dollar-cost averager who invests $500/month regardless: earns the average market return (approximately 10%). Market timer who waits for a pullback before investing: often waits months with cash earning 0-4%, then buys after a 10% dip (but the dip starts from an all-time high that was 15% above their last purchase price, so they lost net). The conclusion reinforces the core lesson: invest when you have the money, regardless of market levels.

The all-time-high analysis challenges the intuitively appealing but empirically incorrect belief that buying at peaks is dangerous. Ned Davis Research and JP Morgan Asset Management have both published studies showing that all-time highs are positive momentum signals, not contrarian sell signals. The mechanism: all-time highs reflect strong underlying fundamentals (earnings growth, economic expansion) and positive investor sentiment. Jegadeesh and Titman (1993, 2001) documented that price momentum (buying recent winners and selling recent losers) generates approximately 1% per month over 3-12 month horizons. All-time highs are the extreme expression of positive momentum. Only if momentum systematically reversed immediately at all-time highs would buying at peaks be suboptimal -- and the evidence shows the opposite: momentum tends to persist. George and Hwang (2004) specifically tested the predictive power of nearness to 52-week highs and found it to be a significant positive predictor of future returns, independent of other momentum measures. The risk: all-time highs sometimes do precede crashes (October 2007, January 2022). But the frequency of this outcome is approximately 10-15% of all-time highs, while the frequency of continued gains is approximately 85-90%. The expected value of investing at all-time highs is strongly positive. An investor who systematically avoids all-time highs is, on average, sacrificing return to avoid a low-probability outcome.