Should I stay invested when markets are at all time highs, is something many will rightly ask. And here is the data to show it;

• S&P 500 is at 6,090 right now (all-time high)
• Eurostoxx at 4,980 now (whisker under all-time high)
• Nasdaq at 19,859 now (all-time high)

Large sections of the global equity universe are at or just below all-time highs. Does this mean there is a massive correction coming? Should I move to cash or some other low volatility asset class to protect my pot from a correction? Natural questions to ask. You probably know what my answer will be, but maybe don’t know why it will be so.

Staying Invested Through Market Highs: A Prudent Strategy for Retirees

For retirees and those nearing retirement, market highs can feel like a precarious time. The temptation to sell, lock in gains, and/or adopt a more conservative approach is understandable. However, it can also be counterproductive.

Decades of research, including studies on the ‘Risk of Ruin’, show that staying invested in a diversified growth-oriented portfolio through all-time highs (and lows!) is a sound strategy for ensuring long-term financial security.

At Informed Decisions Financial Planning, we believe in helping you make evidence-based decisions, not emotional ones. Let’s explore why remaining invested, even when markets are at record levels is one of the most prudent actions retirees can take for their own financial futures.

Market Highs Are Part of Long-Term Growth

It’s important to understand that market highs are not a warning signal. It is easy to feel that they are. As the old saying goes; ‘what goes up must come down’! Right!?

They are a normal and healthy part of the market’s upward trajectory. Research by Dimensional Fund Advisors (DFA) shows that markets reach all-time highs quite regularly over the long term. Since 1926 (just shy of 100 years) the US market has ended the week on a new high in 933 out of 5,099 weeks. This is slightly more than one out of every six. Interestingly, the average return for weeks following these new highs was 0.26%, very close to the average weekly return of 0.22% across all weeks. 

Therefore we can see that hitting an all-time high does not imply an imminent downturn. In fact, history tells us the opposite: markets are often more likely to climb higher after reaching new peaks.

Data reveals that the average one-year return following a new market high is 14.1%. Three-year returns average 10% annually following all-time highs. This means selling out of equities during highs risks missing out on further growth (as opposed to helping you miss out on scary falls!).

The Danger of Market Timing

Attempting to time the market, selling at perceived highs with plans to reinvest at lower levels can have disastrous consequences. Well documented research by J.P. Morgan Asset Management highlights the cost of market timing: missing just the 10 best trading days over a 20-year period can reduce returns by nearly half. This is very relevant for long-term investors who are trying to adopt a ‘set it and forget it’ approach. Jumping in and out can be very costly indeed, and can have the opposite effect on your plans.

For retirees who rely on consistent portfolio growth to sustain withdrawals, missing even a few of these key days can have a lasting impact on their financial security.

The Risk of Ruin: A Key Insight for Retirees

For retirees, the ‘Risk of Ruin’ study provides compelling evidence for maintaining equity exposure. This applies even during all-time highs, as well as all-time lows! The ‘Critical Assessment of LifeCycle Investment Advice‘ study, which we discussed back in Blog 249 in April this year, examines how different portfolio allocations sustain withdrawals over long periods. This detailed research found that portfolios with higher equity allocations had significantly lower failure rates than conservative portfolios with low equity exposure. ‘Failed’ being defined as, the portfolio dying before you do!

Here’s why:

1. Equities Provide Long-Term Growth: Equities historically deliver higher returns than bonds or cash or alternatives, which helps offset inflation and preserve purchasing power over time
2. Low Returns Increase Failure Risk: Portfolios heavily weighted toward bonds or cash struggle to recover from withdrawals, inflation adjustment and fees
3. Diversification Reduces Volatility: A globally diversified equity portfolio minimises regional risks while capturing global economic growth

For example, a retiree withdrawing 4% annually from a 80/20 equity/bond portfolio had a far higher likelihood of maintaining their wealth over 30 years compared to someone with a 50/50 portfolio. The latter often succumbed to the dual pressures of inflation and insufficient growth. So exiting from equity to ‘defensive’ assets at market-highs, or other, is not a long term solution for most.

Why Staying Invested Is Essential

Staying invested through market highs ensures retirees continue to benefit from:

1. The Power of Compounding: Remaining invested allows your portfolio to grow over time. Compound growth is one of the most powerful tools for wealth preservation, and selling out interrupts this process.
2. Recovery from Downturns: Investors who remain in the market are subject to market corrections of course (which have all proven temporary). But they are also positioned to benefit from rebounds, whereas those who exit risk locking in losses, or missing gains.
3. A Hedge Against Inflation: Equities are one of the few asset classes that consistently outpace inflation, a critical factor for retirees who need their income to last for decades.

Practical Tips for Staying the Course – Should I Stay Invested When Markets Are at All Time Highs

To remain confident during market highs, I believe that long term investors and retirees should:

• Revisit Their Financial Plan: A robust plan aligned with long-term goals helps you stay focused during times of uncertainty and fear
• Focus on Diversification: A globally diversified portfolio mitigates risks while providing opportunities for consistent growth and success
• Rebalance Periodically: Rebalancing ensures your portfolio remains aligned with your risk tolerance, even as markets rise
• Maintain an Emergency Fund: Keeping cash reserves can provide peace of mind and prevent the need to sell investments during downturns. This can be internal and/or external to the main pot.
• Partner with a Financial Planner: A fiduciary advisor can help you navigate emotions and make decisions based on evidence, not market noise or internal fears

The Evidence Is Clear: Staying Invested Works

Decades of research and market history lead to the same conclusion: staying invested through all-time highs is one of the most effective ways to preserve and grow wealth. The Risk of Ruin research shows that higher equity allocations provide the growth necessary to sustain withdrawals over time, while studies from DFA and J.P. Morgan emphasise the risks of market timing around all-time highs, and the benefits of disciplined investing. We knew all this already of course, but it’s no harm to hear it again, and again, and again!

For retirees, maintaining a diversified global portfolio ensures you can weather market cycles, outpace inflation, and sustain your lifestyle for decades. Sure, you can try and time things, move in and out as we reach yet another all-time high. However, it is probably going to give you a worse outcome than a good outcome.

All-time highs are not a signal to exit but a reminder of the rewards of staying the course, particularly when we see all-time highs. The below, again from JP Morgan paints a thousand words….

At Informed Decisions Financial Planning, we specialise in helping our valued clients make informed, evidence-based decisions.

By focusing on the long term and trusting the process, you our aim is that you can confidently navigate market highs and lows, knowing your plan is designed for success, no matter what happens next.

I hope this helps.

Paddy Delaney QFA RPA APA

___

Disclaimer

___

The content of this site including blogs and podcasts is for information purposes only. Everybody’s financial situation is different and the content we share on our site and through podcasts may not be applicable to you. 

The articles, blogs and podcasts are not investment advice. They do not take account of your individual circumstances, including your knowledge and experience and attitude to risk. Informed Decisions can’t be held responsible for the consequences if you pursue a course of action based on the information we share