The Truth About Investing at All-Time Highs

Key Concepts

• All-Time High (ATH): A point where a stock market index surpasses its previous highest recorded level.
• Gambler’s Fallacy: The cognitive bias of believing that past random events influence the probability of future outcomes.
• Price-Only vs. Total Return Indices: Price-only indices track stock prices excluding dividends; total return indices include the reinvestment of dividends.
• CAPE Ratio (Cyclically Adjusted Price-Earnings Ratio): A valuation metric that measures the price of a stock market relative to its inflation-adjusted earnings over the past 10 years.
• Momentum Effect: The empirical observation that assets that have performed well recently tend to continue performing well in the short term.
• Market Timing: The strategy of making buying or selling decisions based on predictions of future market movements.

---

1. The Meaninglessness of Index Levels

Ben Felix argues that media reports on "all-time highs" are often misleading due to how indices are constructed:

• Price-Only Distortion: Most reported indices are "price-only," meaning they ignore dividends. Because dividends cause a price drop when paid, price-only indices underrepresent actual investor gains.
• Inflation: Indices are nominal figures. Over long periods, inflation naturally pushes index levels higher, making "all-time highs" an expected outcome rather than a rare event.
• Positive Expected Returns: Stocks have positive long-term expected returns; therefore, hitting new highs should be viewed as a normal function of a growing economy, not a signal of an impending crash.

2. Data Analysis: Frequency and Performance

Using total return indices (1970–May 2026) across 10 developed markets, the following patterns emerge:

• Frequency: All-time highs are common, occurring in roughly 20% of months on average across developed markets. The US market hit ATHs in 30% of months, while Canada hit them in 23%.
• Clustering: ATHs tend to cluster due to the momentum effect. An ATH is statistically more likely to be followed by another ATH than by a market crash.
• Future Returns:
  • Short-term (1-year): Returns following an ATH are consistently higher than in other months, likely due to momentum.
  • Long-term (10-year): Returns following an ATH are slightly lower than average, which is attributed to the fact that ATHs often coincide with higher market valuations.

3. Market Valuations and the CAPE Ratio

While index levels are poor predictors of future returns, valuations (like the CAPE ratio) provide more insight, though they remain imperfect:

• The Theory: High valuations (high price relative to earnings) imply lower expected future returns because investors are paying more for the same future cash flows.
• The Reality: While higher starting valuations correlate with lower 10-year realized returns, the relationship is "noisy." There is a wide distribution of outcomes, meaning high valuations do not guarantee poor performance.
• Global Context: Relying solely on US data (e.g., fearing a CAPE ratio above 40) can be misleading. Looking at international markets shows that high valuations are not a reliable trigger for market timing.

4. Strategic Implications

Felix emphasizes that attempting to time the market based on ATHs or valuation metrics is a flawed strategy for two primary reasons:

1. The "Double-Right" Problem: To successfully time the market, an investor must be correct twice: once when exiting the market and again when re-entering. This is statistically difficult and often leads to lower returns.
2. Persistence: Because returns remain positive on average even after hitting all-time highs, the cost of being out of the market (missing out on gains) is often higher than the risk of staying in.

Conclusion

The main takeaway is that all-time highs are not a signal to sell. They are a natural byproduct of a functioning, growing stock market. Investors should ignore the noise surrounding index levels and focus on maintaining a long-term investment plan. The data suggests that "staying in your seat" is a superior strategy compared to attempting to time the market based on index levels or valuation ratios.