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Should you invest when stock markets are at all-time highs?

With the US stock market hovering around all-time highs, we explain why investors should still consider investing in stock markets.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

When it comes to investing, one of the oldest rules in the investor’s handbook is to buy low, sell high. But is this really a hard-and-fast rule to be followed?

Sharp drops at the start of the pandemic have been followed by surprising climbs. Some markets have even reached all-time highs.

For those who made the most of those drops, the thought of investing when some stock markets are hovering near all-time highs might be a cause to pause.

That’s why we’ve taken a look at what you could do if you have cash to invest and the market is strong.

This article isn’t personal advice. Unlike the security offered by cash, investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. If you’re not sure what’s right for you, ask for financial advice.

Navigating all-time stock market highs

The US stock market set ten new record highs within the first few months of 2021, and it’s continued to climb.

Watching a stock market rise while you’re waiting to make your move can be tough – you might think you’ve missed your chance. But thinking like this puts you at risk of becoming a speculator. It’s crucial to make your decisions on long-term expectations factoring in objectives and attitude to risk, not short-term market moves.

Headlines and investor sentiment all play a part in shaping how the market looks on a day to day basis – markets are volatile over the short term.

Long-term investing requires skill and patience. Remember, investment returns are driven largely by fundamentals and valuations, not speculation.

How to value shares – using different ratios to improve your analysis

If you’re on the fence about investing during all-time highs, here are some top tips to think about.

Put your money to work

If you don’t put your money to work soon enough, it could end up being one of your biggest regrets.

Keeping your money as cash might seem like a safe bet, especially if you’re waiting for the right time to invest. But this isn’t risk free.

Interest rates are at record lows and inflation is on the rise. Inflation is the cost of things we buy every day rising – it reduces our spending power, especially over the long term.

The most recent figures show prices rose by an average of 3.2% over the past 12 months. The Bank of England now thinks the figure could go above 4% by December and stay that high until the spring.

Inflation deep dive – should your portfolio be inflation ready?

If you’re waiting for the right investment opportunity, putting off investing could hold back returns and erode the buying power of your money over the long term.

Waiting for the right time to invest

Time in the market, not timing the market

Give yourself all the time you can. Time in the market is a lot more important than trying to time the market.

In fact, if you’d invested in the UK stock market at the start 1990, 31 years later your investment would be worth over nine times more. That’s despite having gone through big market falls like the dotcom bust, the great financial crisis, the Brexit referendum and the fall caused by the start of the pandemic.

Generally, some of the worst days in the market are shortly followed by the best. You can't get one without the other. But if you try to time it, it can cost you dearly.

If you're afraid to invest because the market is up or down, think about the cost of missing some of the best days.

Impact of missing the best 10 days in the UK stock market (2000-2020, dividends reinvested)

Past performance isn’t a guide to future returns. Source: Lipper IM, from 03/01/2000 to 31/12/2020. Figures based on starting investment of £10,000.

You can see above how much missing some of the best days in the market can cost you.

We don’t know which way the market will move today or tomorrow, but it doesn’t matter when we invest for the long term.

If you start early, and keep adding as you go, time will end up being your best friend when you invest.

When not to invest

Warren Buffett, arguably the world’s greatest investor, once said that it’s wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” And we still think that’s true.

The dotcom bubble saw stock markets rise rapidly for years. But for lots of investors, investing at all-time highs turned from joy to pain.

The reason for the bubble and the burst? Company valuations became detached from reality.

We’re not saying invest in a share at any price. Even if you plan to invest for decades, it’s important you still do your research. Looking at a company or stock market’s average valuation over a long period of time is usually a good benchmark to compare against today. If it feels wildly high, you might want to think more closely about how much you invest there. On the other hand, if you can find a bargain, strategically top up how much you invest.

Diversify, diversify, diversify

There will always be uncertainties when we invest. We can’t control which way which market will move next. So rather than focusing on what you can’t control, focus on what you can. Prepare your portfolio with certain investing essentials like keeping a diversified portfolio.

Diversification means spreading your money between different types of investments. Past performance isn’t a guide to who will be on top in the future. By building a diversified portfolio with a good mix of investments, you’ll likely always have something working in your favour.

Diversification – think strategically


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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