IN FOCUS6-8 min read

Are your clients scared of investing when the stock market is at an all-time high? They shouldn’t be

While many investors may feel nervous about the potential for a fall, analysis of stock market returns since 1926 shows that investing at a new high can be profitable.

15/02/2024
Canary Wharf

The US stock market hit a new all-time high in mid-December 2023 and has moved higher since. At the end of January, it was nearly 3% above the previous peak. This has left many investors feeling nervous about the potential for a fall.

Many also switched more of their investments to cash in 2023, attracted by the high rates on offer. The thought of investing that cash-on-the-sidelines when the stock market is at an all-time high feels uncomfortable. But should it?

The conclusion from analysis of stock market returns since 1926 is unequivocable: no.

The market is actually at an all-time high more often than you might think. Of the 1,176 months since January 1926, the market was at an all-time high in 354 of them, 30% of the time.

And, on average, 12-month returns following an all-time high being hit have been better than at other times: 10.3% ahead of inflation compared with 8.6% when the market wasn’t at a high. Returns on a two-year or three-year horizon have been slightly better on average too (see Chart 1).

Chart 1: Average inflation-adjusted returns for US large cap equities per annum.

Market-high-chart1

Differences compound over time

$100 invested in the US stock market in January 1926 would be worth $85,008 at the end of 2023 in inflation-adjusted terms, growth of 7.1% a year.* In contrast, a strategy which switched out of the market and into cash for the next month whenever the market hit an all-time high (and went back in again whenever it wasn’t at one) would only be worth $8,790 (see Chart 2). This is 90% lower! The return on this portfolio would have been 4.7% in inflation-adjusted terms. Over long time horizons, differences in returns can seriously add up.

Chart 2: Growth of $100 invested in the US stock market from 1926-2023 (inflation-adjusted terms)

Market-high-chart2

This analysis covers a nearly 100-year time horizon, longer than most people plan for. But, even over shorter horizons, investors would have missed out on a lot of potential wealth if they had taken fright whenever the market was riding high (see Chart 3).

Chart 3: Growth of $100 invested in the US stock market (inflation-adjusted terms)

Market-high-chart3

Don’t fret over all-time highs

It's normal for clients to feel nervous about investing when the stock market is at an all-time high, but history suggests that giving in to that feeling would have been very damaging for their wealth. There may be valid reasons for them to dislike stocks. But the market being at an all-time high should not be one of them.

*The annual real growth of 7.1% is calculated as a compound annual growth rate (CAGR) and is not just a simple average of all the periods. When taking a simple average of all the periods there may be some years with positive growth and some with negative growth (i.e. growth will vary from year to year). With a compound annual growth rate, it calculates what constant growth rate would have had to occur every year.

Important information

The views and opinions contained herein are those of Benchmark. They do not necessarily represent views expressed or reflected in other Benchmark communications, strategies or funds and are subject to change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable, but Benchmark does not warrant its completeness or accuracy. The data has been sourced by Benchmark and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Benchmark is not responsible for the accuracy of the information contained within linked sites. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Issued by Benchmark Capital Limited, Registered Office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 09404621

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Benchmark Capital Limited, Registered Office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 09404621

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