Despite Uncle Jay’s best efforts towards the end there, 2024 was a good year for capital markets and many close out the year at, or close to, all-time highs.
If you have a lump sum to invest, lobbing it all into the market now can feel disconcerting. After all, no-one wants to be the mug that rings the bell and invests right at the top before a big fall.
Such fear may seem perfect rational - but is investing when markets are “high” actually any risker than investing during “normal” periods?
To find out, I looked at end of month price data (note - excluding dividends) for the MSCI World Index going back to the end of 1969 and compared the average overall 1, 3 and 5 year returns over that time period to the 1, 3 and 5 year returns from when the index had broken out to a new all-time high.
The numbers are below. Average returns from any point are shown in blue, the returns from all-time highs are shown in yellow (#branding).
So while we see a little bit of a discount in average 12 month returns when money was invested at all-time highs, a 6.41% average return is hardly disastrous.
Moreover, there is barely any difference when we extend out to 36 and 60 month time frames.
There are a couple of things to say here. The first is that if the lower relative average 12 month return shown above puts you off investing now, you shouldn’t really be investing at all.
A year can feel like a long time, but for the well-informed and well-intentioned investor it is an irrelevance. But a speck on a chart.
The second thing to say is that the trouble with “waiting for a pullback” from a new market high is that a) all time highs are pretty common and b) they tend to cluster around each other. So you might have to wait a while.
The below chart shows the performance of the MSCI World Index from the end of 1969 to the end of November 2024, with any new all-time highs along the way dotted in yellow.
During the period shown, the market closed the month at all-time highs 24.24% of the time. So while all-time highs are the exception, they are far from uncommon.
You will also notice that the yellow dots tend to occur in clusters. This intuitively makes sense, when the market breaks out to new all-time highs it becomes easier for it to make further highs again. The trend is on your side, or not if you are sat in cash waiting for a move lower.
So in summary, if you are choosing to invest at all-time highs - you should expect somewhat lower short term returns and perfectly normal longer term returns. You are also minimising the risk of the trend leaving you behind. On balance, knowing what we know, it is a fairly logical step to take.
It could go wrong initially of course, but as you continue your journey as an investor, your original entry point just becomes less and less relevant.
It can be really difficult to imagine, particularly if you are unlucky in those first few years, but as time progresses the impact of any initial drawdowns just washes away as the capitalist compounding machine clanks into gear.
A few years back, I was asked to spend a couple of weeks giving “market updates” during a client event that my old shop was putting on at various venues around the country. At the end of each of these presentations I would finish with the story of Wally Buffett, Warren’s less savvy (and entirely fictional) younger brother.
This is that story.
In December 1976, Wally was lucky enough to inherit £1 million from his great uncle Joe back in the UK.
The stock market had been on a tear, and inspired by his brother’s endeavours, Wally wanted to “get in on the act”. So as soon as he receive his cheque, he invested £100,000 into the same MSCI World Index that we have been looking at above (this time however with dividends included).
Sadly for Wally, December 1976 turned out to be a pretty woeful time to invest this first lump of his inheritance - the market fell by just over 14% over the next year or so.
Wally was put off for a bit by his bad luck until finally, after the market had been on a great run again, he decided to invest another £100,000 in February 1985.
Incredibly, Wally had chosen to make his second investment just before another big fall of 14%. How’s your luck!?
However, once again, after a few more years of licking his wounds, Wally plucked up the courage to invest another £100,000 in August 1987. Surely, third time would be a charm?
The fall was even worse this time! 30% in a few short months. Poor Wally.
Sadly, our Wally seemed to exhibit two really quite unfortunate characteristics.
He was both unlucky, and as it turns out, a real glutton for punishment. Over the next 35 years, Wally managed to invest the remainder of his £1 million inheritance - in equal tranches of £100,000, and all at the worst possible times just before big falls (December 1989, July 1998, August 2000, May 2007, December 2010, July 2019 and December 2021).
By the time Christmas 2024 rolled around, Wally had pretty much written off his investments. His track record as an investor was truly diabolical, particularly in contrast to his now illustrious brother.
Nonetheless, as a Christmas treat to himself, on the 29th December 2024 Wally dug out the password to his investment account log-in to see where he was at.
Wally Buffett, the worst market timer in history, had turned £1 million into £21,307,318 only by investing at market tops.
Despite his terrible timing and luck in the short term, in the long term the combined magic of capital markets and compounding grew each of his investments massively (especially the early ones).
This is all well and good, but here’s the thing.
All of the facts and figures and charts and data are great, but real-life isn’t theoretical and it doesn’t exist on a spreadsheet.
Say you have come into a lump of life-changing money via the sale of a business, from an inheritance or by winning the pools. Having the sort of data that we have above to hand might be of some comfort that you are doing the right thing in investing the money immediately, but it is unlikely to fully get rid of that sick feeling in the pit of your stomach.
Although the odds are firmly in your favour, you might end up being one of the unlucky ones who sees a big drop immediately and you’re not all that sure that you’re up for that.
Such fears are normal. Such fears are human.
In recognition of this, next week I’ll have a look at the various approaches that you can take if you don’t feel comfortable “lobbing everything in” on day one. None are perfect sadly, but if we’ve learnt anything - it’s that perfect just doesn’t exist.
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