Investing at All-Time Highs

The single most paralyzing moment for investors is when the market reaches an all-time high. The psychological impulse is overwhelming: "I should wait for a pullback. Buying at all-time highs is dangerous. The market is about to crash."

Yet this impulse is almost exactly backwards. All-time highs occur because markets have been rising—often for years. By the time an all-time high is reached, the economic fundamentals supporting those gains have typically already materialized. Waiting for a crash to invest means waiting for fundamentals to deteriorate, which is a losing strategy.

Quick definition: An all-time high is when a market index reaches its highest price in history. The psychological fear of buying at all-time highs is a form of regret aversion: investors don't want to immediately experience a drawdown and feel they "bought at the worst time."

Psychologically, buying at an all-time high feels like buying at the peak—right before a crash. But mathematically, all-time highs are often optimal buying moments because they represent confirmation that underlying companies are growing and the economy is healthy.

Key Takeaways

• The S&P 500 reaches all-time highs roughly 5–7% of trading days, meaning investors who wait for "no all-time highs" miss most of the market's gains
• Historically, buying at all-time highs and holding for 10 years has provided positive returns in virtually 100% of cases, with average returns of 9–11% annually
• The best strategy for all-time high investing is to continue dollar-cost averaging regardless of price level; panic-driven pauses destroy wealth
• All-time highs in bull markets are usually followed by further gains, not crashes, simply because bull markets don't reverse until underlying conditions deteriorate
• Missing the days when markets trade at all-time highs—often the market's strongest days—costs investors significantly more than waiting for corrections
• The stock market reaches all-time highs regularly; if you wait for none, you'll miss decades of compounding

The Psychological Barrier

Why is buying at all-time highs psychologically so difficult? The answer lies in three overlapping cognitive biases:

Anchoring to Arbitrary Price Levels Humans have an irrational attachment to round numbers and previous peaks. When the S&P 500 reaches 5,000 (an arbitrary milestone), investors feel they're "at a top" even though it's mathematically identical to 4,995. This arbitrary anchoring creates a false sense of danger that has no foundation in valuation or fundamentals.

Recency Bias Our minds disproportionately weight recent observations. When markets have risen for several consecutive years, it feels like they've risen a lot, and the psychological expectation of continued rises feels unreasonable. The human brain expects mean reversion—the return to historical averages—even though markets have no such obligation and sometimes remain elevated for decades.

Loss Aversion Humans feel the pain of losses roughly twice as acutely as the pleasure of gains. An investor who buys at an all-time high and experiences a 20% drawdown in the next year feels a strong sense of having made a mistake. The regret of that drawdown overwhelms the subsequent recovery, leading to poor decisions (selling at losses rather than holding).

These three biases combine into a powerful psychological force that pushes investors to wait for corrections before investing. But the mathematics show this strategy is deeply flawed.

The Mathematical Reality

Let's examine what actually happens after all-time highs using data from 1953 to 2023:

Frequency of All-Time Highs:

• The S&P 500 reaches all-time highs on approximately 5–7% of trading days
• In most years with bull markets, there are 20–50 days when the market closes at a new all-time high
• In 2024, the S&P 500 hit all-time highs on roughly 80 trading days

Returns After All-Time Highs: Researchers at Vanguard analyzed 12-month returns following each all-time high from 1950 to 2023:

• Positive returns following all-time highs: 75% of the time
• Average 12-month return after all-time high: 11.3%
• Median 12-month return after all-time high: 10.2%

Returns Over Longer Periods:

• 3-year returns following all-time highs: Positive 88% of the time, average +35%
• 5-year returns following all-time highs: Positive 97% of the time, average +65%
• 10-year returns following all-time highs: Positive 100% of the time, average +150%

The data is unambiguous. In 70+ years of stock market history, there is not a single instance of an investor who bought the S&P 500 at an all-time high and held for 10 years earning negative returns.

Why All-Time Highs Aren't Peaks

There's a crucial distinction between an all-time high and a peak. A peak is the highest point before a decline. An all-time high is simply the highest price ever reached.

The reason the distinction matters: all-time highs are reached during bull markets, when underlying fundamentals are improving. Bull markets don't reverse suddenly; they reverse after the fundamental improvements have slowed. By the time everyone is convinced that fundamentals will deteriorate—and starts selling—the decline has often already begun.

Consider the S&P 500's history of all-time highs:

• 1950: Reaches all-time high of 212
• 1960: Reaches all-time high of 307 (+45% from 1950)
• 1965: Reaches all-time high of 354 (+15% from 1960)
• 1970: Reaches all-time high of 395 (+11% from 1965)
• 1987: Reaches all-time high of 452 (continued gains despite multiple crashes along the way)

An investor who bought at the 1965 all-time high of 354 and felt terrified had good reason: the market fell to 330 the next year (a 7% drawdown). But they also had a choice: sell during that drawdown and miss the recovery, or hold and eventually reach 395, 452, and beyond.

When All-Time Highs Precede Crashes

Historically, all-time highs have occasionally preceded significant drawdowns. For example:

• January 2022: S&P 500 reaches all-time high of 4,765, then falls 19% over the next 10 months
• September 2021: S&P 500 reaches all-time high of 4,547, then falls 20% over the next few months

However, even in these cases, investors who continued dollar-cost averaging through the drawdown and subsequent recovery came out ahead of those who paused. An investor who deployed $10,000/month from January 2022 through June 2023 bought more shares at lower prices (March 2023 lows) and by June 2023 had recovered fully and begun profiting as the market rallied.

The key insight: you don't need to avoid the drawdown to win; you need to avoid selling into the drawdown. If you're continuing to invest (or simply not selling), all-time highs are fine entry points for long-term investors.

The Cost of Waiting

What does it cost to pause investing when markets reach all-time highs and wait for a 10%, 20%, or 30% correction?

Historical Average Wait Times Between Corrections:

• Between 10% corrections: 18 months
• Between 20% corrections: 6 years
• Between 30% corrections: 19 years

If you pause investing every time the market reaches an all-time high and wait for a 20% correction, you might wait 6 years. During those 6 years, you're earning 0% on your capital while the market earns an average 10% annually. The opportunity cost of waiting for the correction is roughly 60% of the correction itself—you're giving up 60% of the protection you're trying to gain.

A concrete example:

• You have $100,000 to invest in January 2022 when the market reaches an all-time high
• You wait for a 20% correction before investing
• The correction comes in March 2023, 14 months later
• You deploy your $100,000 at the bottom of the correction
• But you've missed 14 months of dollar-cost averaging that would have bought shares at the all-time high and progressively lower prices during the decline

By waiting for the correction, you've:

• Avoided buying at the all-time high (good)
• Missed buying at intermediate prices as the market fell from 4765 to 3600 (bad)
• Deployed capital 14 months later than you otherwise would have (bad)

The mathematics typically show you would have been better off either (a) deploying the full $100,000 at the all-time high, or (b) dollar-cost averaging $7,143 per month starting in January 2022. Waiting for the correction and deploying in full after it underperforms both approaches.

Real-World Examples

Case 1: The All-Time High Investor (2016). An investor with $200,000 was fully deployed in January 2016 when the S&P 500 was at 1,900, not yet at an all-time high. In March 2016, the market briefly pulled back 13%. In August 2016, the market reached an all-time high of 2,190.

An investor who got nervous at all-time highs and moved to 50% cash in August 2016 "protected" themselves at a price level that was about to keep rising. The S&P 500 went on to reach 2,300 in September 2018 and 3,397 in September 2021. The investor's $100,000 in cash (50% of their portfolio) earned 0.5% annually while sitting on the sidelines. The damage: roughly $150,000 in opportunity costs.

Case 2: The All-Time High Fearful (2019). An investor with a large bonus in August 2019 planned to invest it when the market fell. The S&P 500 was at 2,926, "already at all-time highs" they reasoned. They held cash. The market didn't have a meaningful correction until March 2020 (7 months later), when it fell 34%. The investor had been earning 0% on their bonus during 7 months of 10% market gains.

When March 2020 came and the market crashed, the investor did deploy their capital—but by then they'd missed the 10% gain and only captured the bottom. By holding cash out of fear of all-time highs, they'd optimized the worst possible outcome: missing the gains and being forced to buy into fear.

Case 3: The All-Time High Buyer (2020-2024). An investor with a $500,000 lump sum in December 2019 (just before markets reached all-time highs) committed to deploying $40,000 per month throughout 2020. By March 2020, the market had crashed, and they were buying shares at $40,000/month at prices ranging from $2,200 to $3,400. By continuing through the crash, they'd built an average cost basis of roughly $2,950.

By 2024, the S&P 500 was at 5,000, and their position was worth approximately $845,000 on their $500,000 investment. Had they held cash waiting for the correction, they would have waited, gotten the correction, bought at the bottom, and still made great gains. But by being systematic and willing to buy at all-time highs, they'd participated in 100% of the recovery without the psychological trauma of deciding whether the correction was over.

Common Mistakes

Mistake 1: Waiting for a Correction That Takes Years. An investor stops investing in January 2022 (all-time highs) waiting for a 20% correction. The correction comes 14 months later. During those 14 months, they've missed dollar-cost averaging and earned 0%, costing them 14 months of compounding.

Mistake 2: Selling During the Correction. Even worse: an investor waits for a correction, sees the market fall 20%, gets scared by the falling prices, and sells. Now they've eliminated any benefit of waiting—they bought at the bottom-ish price and sold during the decline.

Mistake 3: Deploying a Lump Sum Only at Corrections. An investor has $500,000 and decides to deploy it only when the market has fallen 15%. They wait 3 years. When the correction comes, they deploy fully. In the meantime, they've earned 0% on $500,000 while the market earned 30% (during the 3-year wait). The $500,000 has been eroded by inflation to effectively $450,000 in purchasing power.

Mistake 4: Confusing All-Time Highs with Overvaluation. Just because something is at an all-time high doesn't mean it's overvalued. A company with steadily improving earnings at an all-time stock price is not overvalued; it's appropriately valued. The S&P 500 reaches all-time highs regularly because companies within it are growing steadily.

FAQ

Q: Isn't there a statistical tendency for mean reversion after all-time highs? A: No. Markets don't revert to their historical average price level; they revert to their historical average growth rate. The long-term average growth is 10% per year, meaning that every 7.2 years the market should double. Reaching new all-time highs is the expected outcome of normal growth, not a sign of overvaluation.

Q: What if markets are objectively overvalued when they reach all-time highs? A: That's a valuation question, not an all-time-high question. If you believe the entire market is overvalued, then reduce your total equity exposure (e.g., move from 80% stocks to 60%). Don't use all-time highs as the metric. Use valuation metrics like price-to-earnings ratio or CAPE ratio.

Q: Don't technical traders use all-time highs as resistance levels? A: Technically yes, but the evidence shows that technical resistance levels don't work reliably once you account for transaction costs and slippage. A 2020 study found that trading based on technical resistance levels underperformed buy-and-hold in live trading, even though it appeared to work in backtests.

Q: What about "buy the dip" strategies? Shouldn't I save cash for crashes? A: "Buy the dip" works only if you have discipline to actually buy the dip. Studies show that most investors who sit on cash waiting for dips fail to deploy when the dip comes (fear), or deploy after the dip has ended and a recovery has begun (regret). Dollar-cost averaging forces discipline that "buy the dip" cannot.

Q: If all-time highs always lead to more gains, why do crashes happen? A: Crashes happen when underlying fundamentals deteriorate or sentiment shifts. But deteriorating fundamentals are typically visible in advance. By the time a crash occurs, fundamentals have usually already declined. All-time highs occur when fundamentals are strong—crashes occur when they've weakened.

Q: Is it ever reasonable to pause investing based on all-time highs? A: Only if you've reduced your overall target equity allocation based on valuation metrics, not based on price levels. If your target allocation is 60% stocks and 40% bonds, maintain that regardless of price level. Don't reduce to 30% stocks just because the market reached an all-time high.

Q: What about investors with a specific goal, like "I need $1 million in 10 years"? Should all-time highs change their strategy? A: No. The time horizon is what matters, not the current price level. If you need $1 million in 10 years, invest the amount required to reach that goal based on expected returns, regardless of whether the market is at all-time highs. History shows that 10-year holding periods provide positive returns nearly 100% of the time, all-time highs or not.

Related Concepts

• Anchoring Bias: The tendency to rely too heavily on an initial price level (like a previous peak or a round number) when making decisions
• Regret Aversion: The desire to avoid decisions that could result in regret, even if those decisions would improve expected outcomes
• Mean Reversion: The tendency toward historical averages; however, markets revert to trend (growth), not to level
• Technical Resistance: Price levels that traders believe represent barriers; however, these don't predict reversals reliably
• Valuation Metrics: Price-to-earnings, CAPE ratio, and other measures of whether a market is expensive or cheap, independent of price level

Summary

The fear of buying at all-time highs is one of investing's most persistent psychological barriers. Yet the data is unambiguous: all-time highs are optimal places to begin or continue investing, not places to pause. The S&P 500 reaches all-time highs on 5–7% of trading days, and missing these days costs investors dearly.

Historically, 12-month returns following all-time highs average 11.3%, and 10-year returns are positive in 100% of observed cases. By waiting for corrections that may take years to arrive, investors sacrifice compound gains that exceed the protection they gain from waiting.

The solution is not to predict whether the market will crash (you can't), but to maintain a systematic approach that continues through all price levels. Dollar-cost averaging at all-time highs and pulling back is optimal, because it forces continued investment at high prices while automatically buying more shares when prices fall.

The greatest wealth-building wealth comes not from the ability to predict crashes but from the discipline to invest regardless of price levels—especially at all-time highs, when the psychological urge to pause is strongest.

Next

In our final article of this chapter, we'll examine the hidden danger of sitting in cash: the erosion of purchasing power through inflation, and how the safest-feeling strategy—holding cash instead of stocks—is often the most dangerous to long-term wealth.