It’s great when the market goes up, but a strong stock market can make investors nervous. Understandably, people worry that whatever goes up must come down, and a market reaching for new highs must be about to head south.
You’ve probably heard that you’re supposed to buy low, and you may have even trained yourself to see weak markets as a buying opportunity (well done!). So, what are you supposed to do when the markets just keep going up?
The answer, for most long-term investors, is probably “whatever you were doing before”—as long as you’ve been practicing smart investing.
But let’s clear this up early: Things could go horribly wrong at any time, so please see the disclaimer at the bottom and make your own decisions.
“Contrarians” are investors who prefer to avoid herd mentality. When contrarians see everybody panicking like it’s 2008, they realize that this too shall pass, and they might even buy more stock. They may say “the stock market is on sale” or similar. (Click for full size)
Historically, that has been a helpful reflex—to not join the emotionally charged herd behavior—when it comes to investing.
Even when the markets go up, herd mentality can be dangerous. Investors in the tech boom (and every other bubble in history) eventually lost money. 1999 couldn’t last forever.
When emotions like irrational exuberance drive the market, proceed with caution. But it isn’t always the case that emotions are driving the markets. Sometimes, markets rise because stocks become more valuable: Profits grow, and the long-term prospects of companies improve.
The market is supposed to go up over the long term. For decades, that’s primarily what it’s done – with plenty of crashes and head-fakes along the way. That bumpy road is the justification, or the price of admission, for those higher returns that we expect out of the stock market. We can’t expect to get high returns unless we’re putting money at risk.
Between 1995 and the end of 2015, the S&P 500 with dividends reinvested returned roughly 9.5% average annual returns. Of course, we never know what the future brings, and past performance is no guarantee of future results. That “average annual” return includes years when investors suffered substantial losses and years when they did very well. There is probably not a single year in which the market returned exactly 9.5%.
Want to zoom in on the financial crisis? The market returned roughly 6.14% per year between September of 2007 (just before things got bad) and the end of 2015. Buying at that “peak” is better than a sharp stick in the eye, although the volatility in 2008 was an unpleasant experience.
If you answer yes to both of those questions, you’re probably a long-term investor (and even cautiously optimistic). So, how should you invest? Invest in the same way you would if you were ignoring the markets.
The Age-Old Investor’s Dilemma
Let’s face it – we’ve all been there. You’re staring at your investment app finger hovering over the “buy” button while that stock price chart keeps climbing higher and higher. That nagging voice in your head whispers “Should I really buy now when prices are so high? What if it crashes tomorrow?”
I get it. This is probably one of the most common questions I receive from readers. The fear of buying at the peak is real and nobody wants to be that person who bought right before a market correction.
But here’s the thing – this question isn’t as straightforward as it seems. Let’s dig into this topic and see if we can find some clarity.
The Counterintuitive Truth About High Markets
First, let me share something that might surprise you: historically speaking, buying when markets are at all-time highs has actually been a winning strategy.
Wait what? That sounds crazy right?
But the data tells an interesting story. According to research from Schroders, markets that reach new highs tend to continue performing well. In fact, when the S&P 500 has hit an all-time high, the returns over the following 12 months have been positive about 80% of the time.
The Psychology Behind Our Hesitation
So why does buying high feel so wrong? It’s all about our brain wiring.
We humans suffer from what psychologists call “anchoring bias” – we fixate on past prices as reference points. When we see a stock that used to be $50 now trading at $100, our brain screams “too expensive!” even if the company’s value has legitimately doubled.
There’s also “loss aversion” – the fact that we feel the pain of losses more intensely than the joy of gains. This makes us extra cautious when prices seem “high” by historical standards.
When High Isn’t Really “High”
Here’s a crucial point many investors miss: a stock trading at its highest price ever doesn’t automatically make it “expensive.”
Think about it like this:
- Amazon’s stock price was at an “all-time high” in 2009
- It was also at an “all-time high” in 2015
- And again in 2020
- And probably many times since then!
If you’d avoided Amazon every time it hit a new high, you’d have missed out on tremendous gains.
What matters isn’t the absolute price but the relative value – what you’re getting for that price in terms of earnings, growth potential, and future cash flows.
Strategies for Buying When Markets Seem Expensive
So should you just blindly buy when stocks are at highs? Of course not! Here’s what smart investors do instead:
1. Focus on Value, Not Price
A $1,000 stock can be cheaper than a $10 stock if the underlying company fundamentals justify it. Look at metrics like:
- Price-to-earnings (P/E) ratio
- Price-to-sales (P/S) ratio
- Debt levels
- Growth rate
- Competitive advantages
2. Dollar-Cost Averaging Is Your Friend
Instead of going all-in at once, consider spreading your purchases over time. This technique, called dollar-cost averaging, helps reduce the impact of volatility.
For example, if you have $10,000 to invest, you might invest $2,000 every month for five months. This way, if the market drops after your first purchase, you’ll be buying more shares at lower prices later.
3. Consider Relative Valuation
Sometimes stocks look expensive compared to their own history but cheap compared to alternatives or their sector.
For example, tech stocks might have higher P/E ratios than bank stocks, but that doesn’t automatically make them overvalued – different industries have different growth profiles and capital requirements.
The Historical Perspective: Markets Climbing Higher
Let’s take a step back and look at the bigger picture. The stock market has a strong upward bias over long periods. This means:
- All-time highs are actually common in healthy markets
- Markets spend more time at or near all-time highs than most people realize
- Waiting for significant pullbacks might leave you on the sidelines for years
According to Schroders research, between 1988-2020, the S&P 500 made 310 all-time highs! That’s an average of about 10 new record highs per year.
The Cost of Waiting for a “Better Price”
Many investors fall into the trap of waiting for a perfect entry point that never comes. While they wait for a 10% pullback, the market might climb another 20%.
Let me share a real-world example:
In early 2013, many investors thought markets looked “too high” after strong gains in 2012. Those who waited for a pullback missed out on a 30%+ gain that year. The correction eventually came… but from a much higher level than where those cautious investors could have entered.
What About Today’s Market?
Now, I’m not saying today’s market isn’t expensive by some measures. Depending on when you’re reading this, valuations might indeed be stretched. But here’s what we know:
- Interest rates impact stock valuations (lower rates generally support higher valuations)
- Innovation and growth prospects vary across sectors
- Market timing is extremely difficult even for professionals
A Balanced Approach for Today’s Investors
So what should YOU do? Here’s my practical advice:
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Have a plan and stick to it. Decide on your asset allocation based on your goals and risk tolerance, not market timing.
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Invest regularly regardless of market levels. Consistency beats perfect timing almost every time.
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Be selective. In expensive markets, be more picky about what you buy. Focus on quality companies with sustainable advantages.
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Keep some powder dry. Having some cash available lets you take advantage of volatility when it comes.
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Think long-term. The longer your time horizon, the less important your entry point becomes.
A Real-World Perspective: My Own Experience
I’ve personally made the mistake of waiting too long for the “perfect” entry point. Back in 2016, I thought tech stocks were getting too expensive and waited for a pullback. Well, they kept climbing for years before a significant correction came.
The lesson I learned? Perfection is the enemy of progress when it comes to investing. Now I focus more on buying good companies at reasonable prices rather than trying to predict short-term market movements.
Common Mistakes to Avoid When Markets Are High
When markets reach new highs, investors often make these mistakes:
- Becoming too conservative and moving entirely to cash
- Chasing performance by buying the hottest stocks regardless of valuation
- Abandoning diversification principles
- Making big, all-or-nothing decisions
- Checking portfolios obsessively and making emotional changes
The Smart Investor’s Checklist
Before investing when markets are at highs, ask yourself:
- Do I have a long-term investment plan?
- Am I investing money I won’t need for at least 5+ years?
- Have I done my research on the specific investments I’m considering?
- Am I properly diversified?
- Would I be comfortable with a 20-30% temporary decline?
- Am I investing based on fundamentals rather than emotions?
If you answered “yes” to these questions, you’re probably on solid ground regardless of market levels.
Summary: Is It Good to Buy Stocks When They’re High?
There’s no one-size-fits-all answer, but here’s what we know:
- Historically, buying at all-time highs has often led to positive returns
- Price alone doesn’t determine value – fundamentals matter more
- Time in the market beats timing the market for most investors
- A systematic approach works better than trying to pick perfect entry points
The most important thing is to have a sound investment strategy that aligns with your financial goals and risk tolerance. Don’t let fear of buying at the “top” keep you from participating in markets altogether.
Remember, the best investment strategy is one you can actually stick with through market cycles. Consistency and discipline will likely serve you better than perfect timing.
Final Thoughts
What matters most isn’t whether you’re buying at an all-time high, but whether what you’re buying represents good value relative to its prospects and whether your overall portfolio is constructed to weather different market environments.
And hey – if you’re still nervous about diving in when prices are high, that’s ok too! Just make sure your caution is part of a thoughtful strategy rather than an emotional reaction.
What’s your experience with investing during market highs? Have you held back only to regret it later, or have you been burned by buying at the peak? I’d love to hear your thoughts in the comments!
Happy investing,
[Your Name]
What About a Lump Sum?
Those one-off situations require careful consideration, but that doesn’t mean you should hold off on investing when markets have been rising.
Again, ask yourself the questions above. Next, do an honest assessment of how you would feel and react if the market falls immediately after you invest all of your money (nobody would appreciate that). With that information, make a strategy.
You don’t have to invest everything all at once—but it’s dangerous to try to time the market. Instead, make a plan and stick to it. Yes, that’s boring, and that’s how it’s supposed to be.
Let’s assume you have a lump sum of cash and:
- The money is not currently (or wasn’t recently) invested in the markets.
- You have determined that the money should be invested in the markets because you’re hoping for more growth over the long term.
One solution is to set up a systematic investment schedule to invest that money over several months. You could even invest over a few years, depending on how much it is and how worried you are. Another option (there are endless possibilities) is to invest half now and the rest over time. Just remember that there’s a tradeoff to every decision you make.
If you move quickly and invest the money immediately or over just a few months:
- You’ll suffer larger losses if you invest aggressively and the market goes down in the near term.
- On the other hand, you’ll be on board if the market continues higher over the near term.
If you move slowly and invest small amounts each month, taking a year or more to get fully invested:
- You’ll miss out on potential gains (opportunity cost) if the market moves up before you get invested.
- On the other hand, you may get to buy at lower and lower prices if the market goes down during the time you’re investing.
Which is best? It depends on what happens and your ability to tolerate losses (whether that means actual losses or missed opportunities). A study by Nick Maggiuli shows that it might just make sense to invest your lump sum if you’re a long-term investor. But that uses aggregate data, and you are just one person with one life to live.
Whatever you do, it’s best to set up a well-defined strategy and follow it. If you decide to invest over the next 12 months, automate those investments so that you don’t have to deal with the logistics every month and—more importantly—you’re not tempted to make changes every month.
Where to keep the safe money: Especially if you plan to hold cash on the sidelines while moving into the market slowly, you need to decide how to invest the “safe” funds. You can leave that money in cash, but it probably won’t earn much (and that might be acceptable if you’re concerned about market losses). Moving a step up farther into the risk spectrum, you could include short-term, high-quality bonds and bond funds, which might pay a bit of interest. However, bonds can also lose money, and you may have trading costs and capital gains to contend with as you sell the bonds periodically.
If you choose to invest any differently while markets are rising, several investment options are typically considered safe. But remember you may be taking different risks, such as the risk of missing out on gains and the risk of losing value to inflation. You can eliminate market risk in FDIC-insured accounts, but you need to trade that risk for something else.
Waiting for Things to Cool Down
When it feels like the stock market is in a bubble, it’s tempting to delay investing and wait for things to settle down. Unfortunately, that’s almost impossible to do correctly. You need to be right about two things that are extremely difficult to get right:
- You need to be correct that this is a high point and a crash is coming.
- You need to pick the right low point and decide when to get in (in the future).
If you’re a long-term investor, this is not only difficult—it’s nerve-wracking and unlikely to succeed over numerous market cycles. You might get lucky once or twice, but you might not. Several studies have shown that it’s not so bad to invest at the high point each year (as if you could be so unlucky to invest at the market high every year). Sure, you might earn a little less, but you’ll probably do better than the market timers. And you’ll be investing, which is what your plan said you’re supposed to do.
The legendary investor Peter Lynch may have said it best:
Note: A “correction” is another term for a stock market crash—or market weakness following strong markets. The term suggests that the market was out of line going up so high, and it needs to get back to more reasonable levels. Saying the market is too high to invest is the gateway to market-timing.
Now that you know what to do when the market is high, prepare yourself for the next time the market goes down.
Just because it’s the disciplined (and often sensible) thing to do doesn’t mean it’s always going to turn out well. If you read this and invest money in the markets, you might lose money. Don’t invest if you can’t afford to take that risk. Murphy’s Law says: This time, for you, in particular, things could go badly. So, proceed with caution.
Want some help investing in a complicated world? Let’s talk about your needs and formulate a plan. I can provide guidance on an hourly or flat-fee basis, or I can handle your investments for you if that’s what you prefer.
Should You Buy Stocks Now at All-Time Highs?
FAQ
Should you buy stocks when they’re high?
Market highs are common. Data shows that investing during most market highs has historically yielded strong returns. Avoiding stocks during all-time highs could drastically reduce potential long-term wealth accumulation.
What if I invested $1000 in S&P 500 10 years ago?
What is the 7% rule in stocks?
The “7% rule” for stocks is a risk management strategy that dictates selling a stock when it drops 7% below the purchase price to limit losses and preserve capital. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.
Is it better to buy high or low stocks?
Several investors believe that the lower value of a stock has a better chance of doubling up and delivering higher returns. The low-priced stocks come with a lower P/E ratio which means the investor has to pay less money to buy stocks of a particular company.