Updated Sep, 2019

The market has never been this high – should I wait to invest?

Reasons not to time the market

1. Being out of the market is also risky

The problem with thinking that the market is at a peak is that you could wait for it to drop, and it could never fall below the price it is now, and you miss out on earning money during the time you were waiting.

The US market hit a new all-time high in 1991. Had you decided to sit out, you would have missed the gains as it continued to hit an all-time high again in ’92, and again in ’93, ’94, ’95, ’96, ’97, ’98, ’99, and 2000. You would have missed out on your money tripling in a decade while waiting for a crash.

A more recent example? The US market hit a new all-time high in 2013, and every year since then, there have been well-known finance personalities in the media saying that the market is about to crash as new highs were reached each year.

I recall a thread on a finance forum by someone who took all their money out of the market around 2014/15 and still had not gotten back in 4 years later. Since then, the market has gone up around 40% and likely will never return to that value again.

Another thread I recall from last year was a couple who sold out around the same time with their 600k life savings because “the market is so high there must be a crash coming”, and so far, they have missed out on $240,000 of gains. They finally threw in the towel, asking how to get back in now when “the market is so high”.

A recent example is this person who pulled out all their money at the start of 2019 and missed out on astronomical 30% gains in a single year.

The point is that when accounting for the lost gains, being out of the market is not necessarily safer than being in the market.

2. You will not actually buy when the market is down

The market dropped 20% at the end of 2018. How many people waiting for the market to drop put any money in at all? What happens, in reality, is that you wait and wait for it to stop falling, and then you’re not sure it has finished falling until it has moved up, then finally it has recovered, is back up, and you missed everything.

The correct way to take advantage of stock market drops is to do nothing different – continue exactly as before, buying periodically as soon as you have money to invest, buying all the way down and all the way back up again – i.e. there should be no change to your strategy of continuing to invest regularly as soon as you have money to invest.

3. If you’re a long way from retirement, it shouldn’t matter

If you’re 10 or more years from needing to take the money out, you have plenty of time to recover from short term market turbulence, and investing sooner than later will give you the highest expected return.

What does it really mean if you’re worried about a crash?

Being afraid is an indication of 2 things.

1. Lack of education about the stock market

Before investing, you need to understand that the higher “expected return” (or “average long-term return” if you like) is due to the higher risk of it going up and down (sometimes a lot) along the way. If you don’t understand this, education is key.

2. Risk tolerance

Once you understand the above point, you still need to be comfortable with the amount of risk you’re taking, and being worried about a crash is indicative of your personal risk tolerance, so only invest as much as you can tolerate seeing a 50% drop and taking years to recover.
To figure this out, double the loss you can tolerate without panicking, and put the rest in fixed income (offset/bonds/TDs/HISA).
For example, if you had 500k and could tolerate seeing it go down to about 350k but not more, you would double the 150k maximum tolerable loss and put 300k into stocks and the rest (200k) into some form of fixed income. When the stock market drops, your overall portfolio will drop less, allowing you to leave it invested to recover.

Obviously, you will get less gains than having it all in stocks, but maximising gains is only one dimension of designing a portfolio. Minimising risks is another. It’s going to be difficult-to-impossible to meet your financial goals if you take more risk than you can emotionally tolerate and panic-sell in a crash when stocks are down, thereby crystallising the temporary losses making it permanent.

The solution to being worried about a market crash is to have an Asset Allocation (AA) of stocks to bonds that’s safe enough to let you sleep at night even if there is a market crash so that you can leave it invested to recover.

To help in deciding on an asset allocation based on your personal risk tolerance

Inflation and why you can’t just put everything in fixed term deposits
The risk-reward spectrum
Asset allocation and your risk tolerance

Further reading

Investing in a raging bull – JL Collins
Asset Allocation Guide: Dealing with conflicting goals – Larry Swedroe
A general comment about “too conservative” investors here – Valuethinker
Math vs. Emotion – Humble Dollar