Why Buying at Market Highs Isn’t a Bad Thing for Investors

History, data and investor psychology suggest that market peaks often mark opportunity, not risk

For investors accustomed to fears of bubbles and bursting valuations, the notion of buying equities when stock indices are at or near all-time highs can feel akin to stepping off a precipice. The prevailing intuition — that high prices signal imminent correction — is woven deep into financial folklore. Yet a growing body of empirical evidence suggests that this instinct may be misplaced for long-term investors. Rather than being a harbinger of loss, buying at market highs has, historically, produced solid returns and may, paradoxically, be one of the better entry points for investors with adequate time horizons.

All-Time Highs: A Frequent Feature of Bull Markets

A common misconception is that markets are rarely at their highest ever levels. In fact, broad equity indexes such as the S&P 500 hit new record highs with surprising regularity over long periods. From 1950 onwards, the S&P 500 has recorded thousands of new all-time highs, averaging multiple fresh peaks each year — so much so that market indexes have traded at fresh highs on a meaningful portion of trading days.

This frequency matters. If markets hit new highs often in upward trending bull runs, then the mere fact of a record should not inherently deter investment. Instead, a new high often reflects persistent momentum, buttressed by underlying economic growth and earnings expansion, which are the key drivers of long-term equity returns.

Data: Returns After All-Time Highs Are Comparable or Better

Contrary to the fear that buying at peaks means buying at the top, several independent analyses show that forward returns after record highs have often been robust.

One comprehensive study by J.P. Morgan found that, for the period from 1988 to 2020, average total returns for the S&P 500 following days when the index closed at an all-time high outpaced average returns from investing on any random day over 1-, 3- and 5-year horizons. Specifically:

• 1-year forward returns were approximately 14.6% for purchases on all-time highs, versus 11.7% overall.
• 3-year cumulative returns were about 50.4% for high-entry points, compared with 39.1% from random days.
• 5-year returns similarly favoured high-entry investing (78.9% vs 71.4%).

Another analysis, based on Fidelity data from 1950 onwards, reinforces this picture: the average 12-month total return after a new all-time high was roughly 12.7%, slightly above average periods overall, and often led to further new highs rather than abrupt declines.

Such data expose the fallacy that buying at a peak is inherently disadvantageous. Instead, they suggest that market momentum and trend continuation often outweigh short-term mean reversion risks — especially in broad indices.

Corrections After Highs Are Less Frequent Than Many Assume

A striking statistic often overlooked in market commentary is how infrequently markets suffer significant declines in the years following all-time highs. According to research highlighted by RBC and others, a drop of more than 10% after an all-time high within one year has occurred only a minority of the time — roughly 9%. Over longer horizons, such deep drawdowns following a new high become even rarer for broad market indices.

This pattern contradicts the intuitive expectation of mean reversion — the idea that markets, having run up too far, must inevitably fall back. In reality, new highs often become the floor for future gains rather than a ceiling signalling imminent decline.

Long-Term Compounding Matters More Than Entry Price

Perhaps the most salient insight for investors is that entry timing, while not irrelevant, is far less consequential than the duration of investment and the power of compounding returns. Renowned behavioural studies and simulations, such as those referenced by Investopedia’s “Costanza Strategy,” demonstrate that even consistently poor timing (e.g., buying at annual market peaks) still yielded meaningful long-term returns over multi-decade periods — often only marginally lower than hypothetical perfect timing at market troughs.

The investor’s enemy here is not high prices but time out of the market. Missing just a handful of the market’s best days — which often cluster around major rallies and even new highs — can drastically erode long-term performance. Stocks have historically delivered most of their long-term gains in relatively few explosive up days, and sitting on the sidelines waiting for lower prices can mean missing these rare but meaningful gains entirely.

Market Psychology: Fear of Peaks vs. Rational Investing

The reluctance to invest at market highs is deeply psychological. It is rooted in loss aversion — the behavioural bias that gives disproportionate weight to prospective losses relative to equivalent gains. This bias leads many investors to overestimate near-term downside risk at the same time as they underestimate long-term growth potential.

Compounding this is the gambler’s fallacy — the mistaken belief that a long advance increases the chances of an imminent reversal. A long streak of record highs does not significantly increase the likelihood of a bear market; rather, bull markets can and do continue for lengthy periods before reversing course.

This interplay of bias and fear helps explain why many individual investors underperform market benchmarks: they sell after losses and delay buying after gains, often switching to bonds or cash in anticipation of a dip that may never materialise.

Valuations vs. Market Levels

Buying at a high nominal level does not necessarily equate to paying an excessive valuation. High market indices often reflect strong corporate earnings growth, healthy profit margins and favourable macroeconomic conditions. If earnings growth is robust — typically the fundamental engine of stock returns — higher prices may simply reflect justified valuation increases, not overvaluation.

Conversely, bear markets often occur when valuations contract against weakening earnings or rising structural risks — not merely when indices reach new peaks.

Practical Implications for Investors

For planners and individual investors alike, the historical evidence yields several practical takeaways:

• Stay invested: Long-term exposure to equities tends to outperform attempts at market timing.
• Regular contributions trump timing: Dollar-cost averaging mitigates psychological stress without sacrificing long-term return potential.
• Diversification matters: While equities often reward patience, balanced portfolios (including bonds, international equities, real assets) can cushion volatility.
• Avoid panic selling: Market downturns and peaks alike are easier to endure with a disciplined, long-term strategy.

Conclusion: Rewriting the Narrative on Market Peaks

The narrative that “you should never buy when markets are high” is seductive because it sounds prudent — it aligns with common sense and loss aversion. But financial history tells a different story. Markets are dynamic systems driven by corporate earnings, economic growth, capital flows and investor sentiment. Record highs, rather than signalling an imminent crash, often represent continued confidence in future growth and earnings.

Data from decades of market history shows that buying at or near all-time highs — if accompanied by a long horizon and diversified strategy — has typically rewarded patient investors. Rather than fear peaks, investors would do better to understand them as signposts of momentum and opportunity, not warnings of inevitable collapse.

In the complex calculus of investing, time in the market — sustained engagement with the market’s upward trend — consistently outperforms attempts to time the market’s peaks and troughs. The ideal of buying low and selling high is a useful heuristic, but it is the discipline to stay invested through the highs — and the lows — that underpins the wealth creation story of equities over the long run.

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