ETF At Record Highs? Avoid This Mistake

Since the stock market has been getting closer to its all-time-high again in 2023, you’re probably wondering if investing into your favorite ETF or company is a good idea right now or if you should hold onto your cash and wait for lower prices before buying.

I don’t blame you for feeling that way, after all everyone prefers buying things on discount whenever possible.

Since I get so many comments on this exact topic, let’s take a closer look today and try to answer these two questions:

1. Why does the market go up in the first place?
2. Is it better to wait or to invest right away even when the market is at an all-time-high? You might be surprised by the results based on historical data.

As usual, I’ll try to include my own experiences I’ve made over the past 6,5 years investing into the stock market via passive low-cost ETFs.

After all, these represent the main pillar of my long-term investment and early retirement strategy. We’ll even take a look at all the instances where my wife and I bought shares at record highs and what happened since.

I was really excited to do more research into this subject as well, so it’s definitely going to be interesting!

Why does the market go up?

Alright, first of all, it might be useful to talk about a few a few reasons why the global stock market goes up over the long run.

Economic growth

Reason number one is economic growth, which leads to business expansion and more innovation. This usually leads to higher earnings and companies becoming more profitable.

Since the most profitable publicly listed companies operate globally, they’re not limited to their home market, but also benefit from higher rates of growth in other regions including emerging markets, where people start consuming more as living standards improve over time.

As a result, the world as a whole is actually growing more than twice as fast as developed markets on their own according to the IMF:

Progress in technology

Progress in technology also leads to increased productivity and efficiency, which enables companies to expand and become more profitable as well. We’re actually seeing this happen right in front of our eyes as we speak, with AI becoming more and more useful.

Inflation

Lastly, inflation increases the price of goods and services over time, which tends to lead to higher revenue for companies, which is then reflected in their stock price.

Stocks have long been an excellent inflation hedge. One recent example we can look at is Argentina, which has been facing extremely high inflation rates from 20-114% per year over the past ten years. As a result, the local currency, the argentine peso lost 98% in value over the past 10 years alone.

Now let’s take a look at their local stock market.

A share of the S&P Merval index, which is made up of the largest stocks in Argentina, stood at 3.358 pesos in July 2013.

For reference, that would have been 459€ based on the exchange rate back then. Now, if someone kept that amount in cash instead of investing it, it would only be worth 10,68€ today. Meanwhile, those initial 3.358 pesos grew to 461.280 pesos within 10 years in the Argentine stock market.

But was that enough to counteract the currency losing 98% in value against the euro over that period?

As it turns out yes, the initial 459€ turned into 1.467€ just ten years later, for a yearly return of 12,36% and a total return of 219,5% in euros.

Now, it’s not like extreme levels of inflation like that are good for businesses or an economy. But at least we have plenty of examples in history showing that investing in stocks, even within a country that’s affected by severe inflation, is usually a very effective way to protect your buying power long-term.

Turkey’s stock market is another example. It 10x-ed in its local currency over the past 10 years, while the turkish lira lost 91% of its value against the euro. While in this case investors didn’t achieve positive returns converted to euros, they still only lost 7% of their wealth compared to losing 91% if they had kept their money in cash:

This is actually one reason why I believe everyone should have at least some of their investments in hard assets like stocks or real-estate, as these have shown time and time again to be an excellent way to protect against higher inflation or even periods of hyper-inflation long-term.

As you know, I prefer the simplicity & the flexibility of owning well-diversified global stock ETFs over owning an apartment or house, which I certainly wouldn’t consider a passive investment. But that’s just my personal preference.

Invest at All-Time-High or Wait?

Ok, now lets get to the main question we’re trying to answer, is it a good idea to invest when the market is at an all-time high or is it better to wait for lower prices?

As we just discussed, there are many reasons why the stock market goes up over time. As a result, it’s actually normal for a well-diversified global ETF to be at or near ATH quite often.

The red dots in these two graphs represent all-time highs in the MSCI World from 1970-2021 (above) and the US stock market from 1870-2021 (below).

According to research by Dimensional Fund advisors titled All-Time-High Anxiety, since stocks have a positive expected return, it’s completely normal for them to reach record highs frequently.

Thus as investors, we shouldn’t be worried or excited when seeing all-time-high prices. To further prove this point, the American S&P 500 index, for which we have the most data, reached a new high in more than 30% of the months over a 94-year period ending in 2020.

But wait, the most interesting aspect of their research is still coming.

Here are the average annualized returns for the S&P 500 after both all-time highs and a 20% market decline:

We can see that historically, yearly returns were actually better in the 1-5 year periods following new highs compared to a 20% market decline.

Well, I did not expect that. How about you? You actually had better odds of higher returns after an all-time-high compared to a 20% correction!

Maybe this example can give you a bit of piece of mind whenever you’re considering wether or not to invest at all-time-highs. At least based on history, you have no reason to be concerned.

By the way, I just want to clarify that in today’s post I’m of course only talking about investments into low-cost ETFs covering broad stock-market indexes like the my personal favorite the FTSE All-World, the MSCI ACWI, the MSCI World or even the S&P 500, in case you only want to invest into the US market.

ETFs focusing on specific sectors or trends like AI are of course a different story and carry a lot more risk.

When we purchased shares at an all-time-high

Now, since I like to include my personal experience in these videos, I spent a bit of time looking at when my wife and I bought our ETF shares since 2017, to find out how often we were buying at or near all-time-high prices.

Just so you’re not confused, back then we actually started with an xTrackers MSCI World ETF before making the switch to only buying the Vanguard FTSE All-World, first in the distributing and then the accumulating version to optimize our taxes. These are the brokers we used.

We’ve held on to the old shares since the position was up significantly and there’s an overlap of about 90% with the FTSE All-World, so it’s still in line with our long-term investment strategy.

Alright, now let’s take a look at when we invested. I marked the points in time when we invested into the MSCI World ETF with red dots on the chart:

Most of our purchases, ending in October 2018, were at an all-time-high (see green arrow) at the time.

Meanwhile, we bought the Vanguard FTSE All-World for the first time in April 2018 and fully switched over to it as a simple all-in-one 1-ETF investment strategy in August 2019. Once again, the red dots show you you all the instances when we bought more shares:

And now when looking at the green arrows you can clearly see how often we were buying at or near all-time-high prices since then!

As you probably noticed, we were investing at record high prices in the market quite frequently over our 6,5 year ETF investment career so far. Had we listened to all the news headlines since then, we would still be standing on the sidelines, waiting for the right time to get in and our investments would be worth significantly less today.

When looking back, I’m really glad we didn’t let that influence us. As a result, our portfolio has grown considerably since we started, by over 39.200€ coming from capital gains and paid out dividends.

Obviously investing both through the covid crash and 2022’s 13% correction (which was the worst year our investments have ever been through by the way) has not been a smooth, easy ride.

And yet, we’ve been rewarded with average yearly returns of 9,87% and an internal rate of return of 8,41% per year so far on our money, which is actually above my long-term expectation of 7% per year on average when investing into ETFs, with lots of ups and downs in between.

The time is never perfect

One major lesson I learned throughout this period is that it never feels like the perfect time to invest, there is always something to worry about.

First it was Trump’s presidency, then Covid, lockdowns, war in Ukraine, inflation, recession fears, interest rate hikes, basically it never ends.

And yet, now my wife and I are so grateful that we stuck to our simple long-term strategy and let none of that stuff influence our investment decisions.

Since the stock market is volatile and regular corrections or even crashes are part of the journey, you should have a time horizon of at least 5 years, ideally 10 years or more when investing into ETFs anyway.

So, whether that’s a lump-sum investment all at once or cost-averaging into the market at regular intervals (by the way, I’m planning something on this exact topic), just get started with your ETF investment journey and don’t put it off until you think it’s the “perfect time”. There is no such thing.

And as you found out today, all-time highs in the markets are certainly not a reason to put off investing either.

But now I want to hear from you guys:

Do you still buy stocks or ETFs when they’re at record highs or do you wait for lower prices first?