It seems as though today may mark the day when the S&P 500 is poised to breach the 5000 mark. While this round number may not hold much logical significance for traders, it carries crucial psychological weight for most investors. The question looming large in the minds of those venturing into the world of investments or those sitting on a pile of cash is this: Is it wise to plunge into the stock market at an all-time high?
For the novice investor, the answer is a resounding yes. As a trader with a contrarian bent, the instinct to buy at what could potentially be the peak of a surge feels inherently illogical; however, this consideration does not weigh heavily when it comes to long-term regular investing. In many ways, starting out on your investment journey is akin to having a baby: logic may provide multiple reasons why now is not an opportune time, but the long-term benefits far outweigh the immediate hesitations.
Delaying contributions to a 401k or IRA due to the market being “too high” raises the question – when would be the ideal time to start? Would it be at a 10% pullback? Or maybe at 20%? Whichever arbitrary figure one selects, commencing investments when the market is in a slump will also seem unwise. By constantly applying the logic of not commencing investments during an upswing or a downswing, one might never end up investing. The crucial bit is just to start. If the market descends, you will still be purchasing stocks while they are low, and if it continues to surge, you will have acquired some stocks at a relatively affordable price.
Making small, regular investments, as is the case with contributing to a 401k or another retirement account, is commonly known to investment professionals as “dollar cost averaging.” This approach eliminates the need for timing the market and allows one to benefit from the inevitable long-term upward trajectory of stocks in a capitalist system. Throughout history, there hasn’t been a twenty-year period in which stocks have yielded negative returns. As a result, if you are initiating investments for a retirement that is thirty or forty years away, the current investments will yield returns, irrespective of whether 5000 turns out to be the peak at this moment.
Conversely, for existing investors with a lump sum to invest, the calculation is not as straightforward, especially when their investment horizon is not measured in decades. If there appears to be substantial resistance at the 5000 level and stocks retract from this point, purchasing at or near the summit could result in a significant setback, making the decision to hold off seem prudent. However, a pullback is not a guarantee. In fact, historical data suggests otherwise:
Noteworthy and substantial plunges in stocks occur due to unpredictable or unforeseen events, such as the credit crisis in 2008 or the pandemic in 2020, rather than proximity to a specific level. Similar deliberations about investing have surfaced when the S&P 500 reached 2000, 3000, and various other “significant” levels over the years, yet here we are, contemplating the 5000 mark.
If you have a lump sum to invest, you are still faced with the same question as new investors: if not now, then when? Unfortunately, there is no definitive answer to that question. The best approach, therefore, is to simulate the advantageous circumstances associated with regular investing inherent in 401k contributions through dollar cost averaging on your own. For instance, if you have $10,000 to invest, why not purchase $2000 worth of stocks or ETFs on the same day each month for the next five months? This way, if the market continues to surge, you will have acquired stocks at a lower price, and if it falters, you will make purchases at even lower levels compared to diving in headfirst.
It’s important to bear in mind that despite generations of brilliant minds studying this, no one can predict with certainty where the market is headed from one week or month to the next. However, what we do know for sure is that at some point in the future, stock indices will be higher. Therefore, regardless of your circumstances and even in the face of the daunting 5000 level, the opportune moment to commence investing is now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
