Investing at market highs: three paths to overcoming paralysis
- Robin Powell
- Oct 22
- 17 min read
Updated: 13 minutes ago
Markets at record levels leave many investors paralysed — whether you're sitting on a house sale, inheritance, or retirement pot. Should you invest now or wait for a pullback? A century of evidence provides a surprising answer that challenges everything your instincts tell you.
Your house has just sold. The proceeds sit in your account, ready to invest. You check the markets: the S&P 500 has notched its 28th all-time high of the year. The FTSE 100 hovers near records. Every financial headline seems to whisper the same warning: This can't last.
Every instinct screams: Wait.
Yet Peter Lynch, one of history's most successful fund managers, once observed something that should give you pause: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves."
Consider this: Since 1950, equity markets have closed at all-time highs roughly 30% of the time. If you've been waiting for the "right moment," you've already missed thousands of them. The record high you're staring at today isn't an aberration — it's exactly what markets with positive expected returns are supposed to produce.
This isn't an article urging you to ignore risk or follow some guru's prediction. It's an examination of what actually happened when investors faced your exact dilemma over the past century. The evidence may surprise you.
The chart below is from my co-author Ben Carlson's blog and shows the number of new all-time highs the S&P 500 has recorded each year since 1990. Notice the clustering pattern: bull markets produce dozens of new highs annually (77 in 1995, 70 in 2021, 62 in 2017), whilst bear markets and recovery periods produce few or none. The 2000-2012 stretch shows the longest drought in modern market history — an anomaly, not the norm.
All-time highs are normal, not alarming
The phrase "all-time high" carries an air of finality, as though markets have reached some natural ceiling. The reality is rather different.
Using data from 1926 onwards, 30% of all month-end observations for the S&P 500 represented new peaks. That's not a statistical oddity confined to recent bull markets. It's the fundamental pattern of an asset class with positive expected returns. Over those decades, markets hit a new weekly high roughly one in every six weeks — or, viewed another way, approximately once every 14 trading days since 1950.
This pattern isn’t unique to US equities. The MSCI World Index, which tracks developed markets globally, shows an identical pattern from 1970 to 2024 (returns in USD, total-return basis; data from MSCI Barra): 30% of month-end observations were new highs. Record peaks aren't a peculiarity of US market structure or Federal Reserve policy. They're what happens when investors demand positive returns in exchange for providing capital.
Weston Wellington of Dimensional Fund Advisors puts it plainly: "Shares are not heavy objects kept aloft through strenuous effort. They are perpetual claim tickets on companies' earnings and dividends."
Thousands of business managers go to work each day seeking profitable returns on capital whilst providing goods and services people desire. Though some ventures fail, the historical record shows that investors globally have been rewarded for the capital they provide.
If stocks must be priced to deliver positive expected returns every day (otherwise no transaction would occur), reaching record highs with regularity is exactly the outcome we should expect. The surprise isn't that highs are common. The surprise is how uncommon our understanding of this pattern remains.
This next chart uses a logarithmic scale to show the S&P 500's price trajectory from 1950 to the present, with each grey dot representing a new all-time high. The sheer density of dots illustrates how frequently records occur during sustained bull markets. The visual makes clear that all-time highs aren't isolated peaks before inevitable crashes — they're regular milestones along an upward path punctuated by occasional corrections.
Frequency alone, of course, doesn't tell you whether investing at highs is wise. What actually happened to investors who committed capital at peaks?
Investing at market highs: the forward return evidence
Here's where the data becomes uncomfortable for anyone waiting on the sidelines: returns after all-time highs are virtually identical to — and in some cases slightly better than — returns following any other market day.
Since 1926, the S&P 500 delivered an average about 13.7% return in the year following a month-end record high, compared with roughly 12% after other months. Three years later, the figures were around 10½% versus about 10¾%, and five years on, the results were nearly identical. (Source: Dimensional Fund Advisors; CRSP US Total Return Index, monthly total-return data 1926–2024).
The pattern is unmistakable — forward returns after highs match those of any other starting point.
The chart below is from Dimensional Fund Advisors and compares forward returns after investing at new market highs (green bars) versus after 20% market declines (orange bars) across different time horizons. The data spans 1926-2022 and reveals a counterintuitive finding: buying at all-time highs actually produced slightly better one-year returns (13.9% vs 11.6%) than buying after significant drops. Over longer periods, the returns converge to nearly identical levels — demolishing the "buy low, sell high" intuition for long-term investors.
The global evidence confirms the pattern. For the MSCI World Index from 1970 to 2024, returns after month-end highs averaged 9.8% one year later and 10.8% both three and five years out — nearly identical to returns starting from any other month.
More telling still: after reaching an all-time high, the S&P 500 was higher one year later 81% of the time, and 86% of the time five years later.
The next chart, from Index Fund Advisors, presents the same evidence in a different format, showing 98 years of S&P 500 data (1926-2024). The blue bars show average annualised returns after investing at all-time highs; the orange bars show returns after investing following greater-than-10% drops. Across one-year (13.7% vs 11.7%), three-year (10.6% vs 10.3%), and five-year (10.3% vs 9.6%) periods, the all-time high entries either matched or slightly outperformed the "buy the dip" entries. The consistency across time horizons is striking.
Consider hypothetical data tracking the S&P 500 from 2005 through 2024. One thousand pounds invested throughout the entire period would have grown to £7,135, representing a 10.32% annualised return. But miss the market's ten best-performing days and that figure drops to £3,271 — a 54% reduction. Miss the twenty best days and you're left with £1,967, having captured just 28% of the full-period return.
Similar analysis of a hypothetical £10,000 portfolio tracking daily stock returns from 1988 through 2024 tells the same story. Staying invested throughout would have produced a portfolio valued at just over half a million pounds. Missing merely the five best days during that thirty-six-year stretch would have reduced the portfolio's value by 37%.
Those best days don't announce themselves in advance. They frequently cluster immediately after the worst days. Investors who fled the market during April 2025's panic — when tariff concerns triggered a sharp sell-off — missed the subsequent 30% rally. The price of attempting to avoid drawdowns is often missing the recoveries that follow.
These “best days” analyses depend on methodology — strong days often cluster around the weakest ones. The broader lesson is that timing errors are costly because rebounds tend to occur during volatile periods, not in isolation.
Successful market timing means getting two decisions right — when to get out and when to get back in. History suggests few manage both, and markets often rebound far faster than investors expect.
“The cost of missing just a few strong days often outweighs the benefit of dodging an entire downturn.”
But surely there's a point where prices are simply too high? This objection feels like common sense. It's exactly what sensible investors thought at the end of 1996.
The valuation timing trap
As 1996 drew to a close, the cyclically adjusted price-earnings ratio — commonly known as the CAPE or Shiller P/E — stood at 27.72, some 82% above its long-run average at that point. Just three weeks earlier, Federal Reserve Chairman Alan Greenspan had delivered his much-discussed "irrational exuberance" speech, warning that "unduly escalated asset values" might be distorting economic behaviour.
The last time the CAPE ratio had approached such levels was October 1929, mere weeks before stock prices tumbled over a cliff. Anyone applying valuation discipline would have concluded: don't invest now. Wait for cheaper entry points.
“Markets rebound faster than our emotions do — and most investors are still on the sidelines when recovery begins.”
What followed instead was one of the strongest three-year periods in market history: a cumulative return exceeding 107% for the S&P 500 through 1999. For the period from January 1997 through June 2014 — encompassing both the technology bubble's burst and the global financial crisis — the S&P 500 returned 7.67% annualised compared with 2.42% for one-month Treasury bills. Returns were modestly below long-run averages, but the equity premium remained strongly positive.
By contrast, a strategy that was fully invested in stocks only during periods when the CAPE ratio sat below its long-run average produced an annualised return of just 3.09% over the same stretch. The valuation-timing approach, despite its intellectual appeal, delivered returns barely exceeding inflation. (Source: London Business School working paper (2013) on CAPE-based timing; S&P 500 and 1-month Treasury data 1997–2014.
Broadly consistent with Ilmanen (2011) and Asness et al. (2017), this suggests that valuation filters have limited out-of-sample reliability).
“Waiting for the perfect entry point feels safe, but the data show it’s one of the riskiest strategies of all.”
The pattern repeated twenty years later. When the CAPE ratio crossed 30 in 2017 — only the third time since 1871 it had reached such heights — a Bloomberg writer asked: "So, is it time to worry?" The only other occasions when CAPE had hit 30 were 1929 and 2000, right before massive market crashes.
From January 2017 through December 2024, the S&P 500 rose 200%, delivering roughly 14.8% per year. Far from signalling an imminent top, the elevated valuation marked a point roughly halfway through a sustained advance.
Weston Wellington identifies the fundamental challenge: "It may be easy to find rules that have worked in the past, but much more difficult to achieve success following the same rule in the future." A 2013 study by professors at London Business School applied CAPE ratios to time market entry and exit points. Their conclusion? "Sadly, we learn far less from valuation ratios about how to make profits in the future than about how we might have profited in the past."
The implementation problem proves insurmountable. It's not enough to know that markets are trading above their long-term average valuation. You must determine: How far above average should the indicator be before reducing equity exposure? At what point will stocks be sufficiently attractive for repurchase — below average? Average? Slightly above average?
All timing strategies face a fundamental problem: since markets have generally risen more often than they've fallen over the past century, avoiding losses in a down market runs the risk of avoiding even larger gains associated with up markets.
This doesn’t mean valuations are irrelevant to long-run expectations — only that they have proven unreliable as short-term timing tools. Marlena Lee and Wes Crill at Dimensional Fund Advisors offer a useful framework for thinking about reasonable expectations through the lens of cost of capital. When the Magnificent Seven stocks rose 76% in 2023, the appropriate question wasn't whether this growth could continue, but whether 76% represents a plausible cost of equity capital. How high would borrowing rates need to be for a business to issue stock at that expected return? If these companies can secure funding through other means at lower rates, 76% isn't their cost of capital — which means it shouldn't be an investor's expected return either.
Long-term data provides a more sensible guide. Across a century of returns, the broad US market has delivered approximately 10% annualised. That figure — not last year's windfall gains — should inform financial planning.
Understanding that valuation timing fails doesn't fully explain why our intuition about market highs proves so powerful. The problem is linguistic.
“Every lost day of compounding is a missed partner in long-term wealth creation.”
Why intuition misleads us
When financial journalists write that "stocks head back to Earth" or that markets are "defying gravity," they reveal a fundamental misunderstanding. These phrases treat equities as physical objects — weights that require constant effort to remain aloft, forever fighting against natural forces pulling them downward.
But shares aren't heavy objects straining against gravity. They're perpetual claim tickets on companies' future earnings and dividends. Microsoft doesn't require "effort" to maintain its market capitalisation. It generates billions in cash flow each quarter serving customers globally. Apple's valuation doesn't "defy" any natural law — it reflects investors' collective judgment about the present value of future iPhone sales, services revenue, and shareholder returns.
“Record highs aren’t warnings — they’re the natural outcome of businesses creating value over time.”
Every day, stocks must be priced to deliver a positive expected return for buyers. Otherwise, no rational investor would purchase them, and no transaction would occur. It's difficult to imagine a scenario where investors freely commit capital with the expectation of losing money.
This daily pricing mechanism doesn't change when markets hit record levels. Whether at a new high or recovering from a correction, today's share price reflects investors' collective judgment of what future cash flows are likely to be. If investors demand positive returns in exchange for holding equities — and they do — then reaching new highs with some frequency isn't a warning signal. It's confirmation the system is working exactly as expected.
Humans are conditioned to think that after the rise must come the fall. This intuition serves us well when considering physical objects or short-term mean reversion. Applied to perpetual claims on growing businesses, it tempts us to fiddle with portfolios in ways that harm rather than help long-term results.
Investors should treat record high prices with neither excitement nor alarm, but rather indifference. The evidence suggests our efforts to improve returns by timing entries and exits will just as likely penalise them.
If all-time highs are normal and forward returns are fine, what should you actually do with money to invest?
Three paths forward
Understanding the evidence doesn't make the decision easier. The mathematics may favour immediate action, but human psychology makes that nearly impossible for most investors. Let's be direct: here are your three options, with honest trade-offs. No option is "correct" — the right choice depends as much on your psychology as on mathematical optimisation.
The mathematics route: lump-sum investing
Start with the uncomfortable truth: if markets decline 10–15% shortly after you invest your full amount, it will feel terrible. You'll know exactly what you've "lost." The phantom alternative — having waited and bought cheaper — will haunt every portfolio check. This emotional cost is real and shouldn't be dismissed.
Yet the historical probability strongly favours immediate, full investment. Markets rise roughly three years out of four. You're buying positive expected returns from day one. There's no regret from watching markets climb whilst sitting in cash, steadily eroding purchasing power and missing dividend reinvestment.
This approach works best for investors who can genuinely separate emotion from mathematics, who possess time horizons of a decade or longer, and who won't compulsively check their portfolio balance each week.
Implementation steps:
Determine your target asset allocation first, based on time horizon and genuine risk tolerance, not current market conditions
Invest to that allocation immediately — all at once
Commit to not checking the account for at least six months
Rebalance only at predetermined intervals (typically annually)
Write down today what you'll do if markets fall 20% or 30% — and stick to that plan
The psychology route: pound-cost averaging
Be honest with yourself: you're paying an emotional insurance premium. You're effectively betting against positive expected returns to purchase peace of mind.
If markets continue rising — the more probable outcome historically — you'll have lower returns than the lump-sum investor. You'll still face the question of when to stop the phased approach. And you'll need extraordinary discipline not to pause or alter your schedule when markets move sharply in either direction.
But if the mathematical case for lump-sum investing is clear yet you genuinely cannot sleep after deploying everything at once, pound-cost averaging offers a defensible compromise.
The approach spreads your entry over six to 12 months, reducing the "I bought at the exact top" regret whilst still moving steadily towards full investment. You're acknowledging that perfect timing is impossible whilst refusing to let paralysis keep you entirely on the sidelines.
This suits investors who intellectually accept that the mathematics favours immediate investment but emotionally cannot pull the trigger on a single large deployment.
Implementation steps:
Commit to a specific timeline before starting (e.g., 10% monthly over ten months)
Make transfers automatic through standing orders — remove discretion
Do not adjust the schedule based on market movements (this defeats the entire purpose)
Accept you're paying a premium for comfort, not optimising returns
Once the schedule completes, you're done — no second-guessing
The diversification route: asset allocation
Reframe the question entirely: you don't need to be 100% in equities to be "fully invested." You can deploy all your capital immediately whilst spreading it across asset classes — stocks, bonds, and cash in proportions matching your circumstances.
A classic allocation might include 60% equities, 30% bonds, 5% in commodities like gold, and 5% in cash. Younger investors with decades until retirement might tilt more heavily towards stocks; those approaching retirement or already drawing income should hold more in bonds and cash-equivalents.
Researchers at Dimensional recently examined so-called "buffered ETFs" — complex derivative products designed to limit downside whilst capping upside. These products attracted £38 billion in new money and saw 97 new ETF launches in 2024, promising to manage investors' fear whilst allowing some participation in gains.
The performance evidence from 2022 through 2024 tells a revealing story. During this period, which included both the sharp 2022 downturn and the subsequent rebound, simple diversification proved more effective than complexity:
During this period (2022–2024, Morningstar category medians), simple diversification proved more effective than complexity:
Derivative Income ETFs — ~21% cumulative, median OCF ~1.0%
Equity Hedged ETFs — ~18%, 1.1%
Defined-Outcome ETFs — ~21%, 0.8%
S&P 500 — ~29%, ~0.03%
Figures rounded; category performance subject to selection bias.
The balanced global 60/40 portfolio outperformed these buffered categories during both the downturn and the rebound, whilst costing roughly thirty times less.
This approach works for near-retirees who need portfolio stability, income-seekers who can't afford severe drawdowns, or anyone wanting immediate full deployment without full equity exposure.
Implementation steps:
Use an age-based rough guide as a starting point: bond allocation approximating your age minus twenty (a 45-year-old might hold 25% bonds)
More precisely, base allocation on years until you'll need significant withdrawals
Set rebalancing triggers when any allocation drifts five-plus percentage points from target
Use low-cost index funds across all asset classes
Review allocation annually, adjusting gradually as time horizon shortens
The real risks
All-time highs aren't the danger. Here's what actually threatens your financial outcomes:
Earnings disappointment
Markets don't crash because prices are high. They crash when earnings disappoint relative to expectations. Data from the Animal Spirits podcast illustrates this clearly: across multiple market cycles, peaks in earnings and peaks in prices cluster within days of each other, not months or quarters apart.
The forward price-earnings ratio tells you what investors expect. But what matters is whether actual earnings meet, exceed, or fall short of those expectations. During the 2000 technology bubble, the forward P/E looked elevated but not catastrophically so. The problem emerged when the "E" collapsed — earnings for many internet companies fell through the floor, taking prices with them.
The practical implication: watching economic indicators that predict earnings — employment trends, consumer spending, business investment, credit conditions — matters far more than watching price levels. Valuations only become genuinely dangerous when they're built on earnings assumptions that prove wildly optimistic.
Personal circumstances
Make sure that you're in an investment strategy that aligns with your financial goals. One that's predicated on quality and diversification and being in something that allows you to ride out the volatility that is inherent in markets.
Four questions matter more than current market levels:
When will you actually need this money? A 25-year-old saving for retirement can withstand volatility that would be catastrophic for a 64-year-old planning to retire next year.
Could you tolerate a 30–50% decline without selling in panic? If honest self-assessment suggests no, reduce equity exposure regardless of valuations.
Do you have adequate emergency reserves? Investing money you might need in the next two years is speculation, not investment.
Is your employment secure if recession strikes? Losing both job and portfolio value simultaneously creates forced selling at the worst moment.
Time horizon mismatch — holding volatile assets with short-term needs — destroys more wealth than poor market timing ever could.
Having no plan
Since World War II, many S&P 500 corrections of up to 20% have recovered within months on average, though recovery times vary widely by episode. But you'll never benefit from this recovery speed if you panic-sell during the decline without a predetermined plan for when and how to reinvest.
The most successful long-term investors aren't those who predict market turns. They're those who pre-commit to asset allocation, write down specifically what they'll do if markets fall 10%, 20%, or 30%, and remove discretion from their frightened future selves.
This means:
Specifying rebalancing triggers before volatility strikes
Committing to regular investment schedules regardless of headlines
Determining the maximum equity allocation you can hold through a full market cycle
Putting these rules in writing and sharing them with someone who'll hold you accountable
Complexity traps
When investors feel anxious, financial services firms offer increasingly complex products promising to smooth the emotional journey. These products rarely deliver value commensurate with their costs.
The buffered ETF evidence is instructive. Beyond their underperformance relative to simple diversification, these products carry tax inefficiencies — they often generate income taxed at ordinary rates rather than more favourable capital gains rates. They require ongoing attention to understand current protection levels and caps. And they represent solutions in search of problems that balanced portfolios already solve more elegantly.
Gerard O'Reilly at Dimensional developed a four-question framework for evaluating any investment:
What's the goal? What problem is this investment meant to solve?
What's the expected return? What realistic outcome should you anticipate?
What's the risk? Beyond volatility, what could go wrong?
What's the cost? Including fees, taxes, and opportunity cost.
Apply these questions rigorously. When products once reserved for institutions start being heavily promoted to retail investors, that's a red flag signalling trend-following and potential mis-selling. Healthy scepticism remains essential.
The antidote to complexity: globally diversified portfolios of low-cost index funds, rebalanced systematically. It's boring. It works.
Embracing discomfort
Every significant investment feels uncomfortable. That discomfort isn't a signal to wait — it's simply the emotional cost of committing capital to uncertain outcomes. The feeling of anxiety when investing a large sum at apparent market peaks is entirely normal. It doesn't mean you're making a mistake.
Here's what we actually know from a century of evidence:
All-time highs occur roughly 30% of the time — one week in six, one day every fourteen trading days. This isn't abnormal. It's exactly what markets with positive expected returns should produce. Forward returns after all-time highs match — and occasionally exceed — returns from any other starting point. Over one, three, and five-year periods, the data shows no penalty for investing at peaks.
We also know what doesn't work: valuation timing. The 1996 case study demolishes the idea that "obviously expensive" markets must be avoided. CAPE ratios above long-term averages have presaged both crashes and continued advances. No implementation rule has reliably predicted when to reduce exposure and when to reinvest.
Returns after attempting to time market entries prove dramatically worse than staying consistently invested. Missing merely the handful of best days in any multi-year period cuts total returns by half or more. Those best days cluster unpredictably, often immediately after the worst days that tempt investors to flee.
“The real risk isn’t market volatility — it’s being out of the market when recovery begins.”
Here's what we don't know, and what no one else knows either despite confident predictions: whether a correction will arrive next week, next month, or next year. How deep that correction might be. How long recovery might take. As Malwal observes: "That's how markets work."
We can't know these things in advance. The temptation to wait for perfect information before investing — to somehow avoid all discomfort — guarantees paralysis. Peter Lynch's observation, quoted at this article's opening, bears repeating: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves."
The question facing you isn't whether markets will correct. They will. The question is whether you'll be invested to capture the decades of growth that occur between corrections, or whether you'll be perpetually waiting for an entry point the evidence shows doesn't exist.
Markets have rewarded long-term holders through two world wars, the Great Depression, the 1970s stagflation, the technology bubble's burst, the global financial crisis, a pandemic, and countless smaller shocks. They've done this not despite reaching record highs but because reaching record highs is what happens when businesses create value and investors provide capital.
Record highs aren't the danger. They're simply the market doing what markets with positive expected returns are supposed to do. The real risk is letting fear of normal market behaviour keep you out of the market entirely.
All statements about historical returns and market behaviour are based on past performance, which does not guarantee future results. All data presented represents historical analysis and should not be construed as predictions or recommendations for future action.
A quick, important reminder
Investing involves risk. The evidence can guide you, but your circumstances are unique. Before making a major investment decision — especially if you’re unsure — seek professional, independent financial advice. A good adviser will help you assess your goals, time horizon, tax position and capacity for loss, and build a plan you can stick with through market cycles.
If you’re looking for someone reputable, try our curated directory: Find an adviser.
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