Investing in stocks as the S&P 500 soars to new record highs - a history lesson reveals a surprising response.
According to a recent analysis by 17 Wall Street analysts, the S&P 500 is predicted to close the year at 6,300, a mere 1% down from its current level of 6,378 [1]. This prediction, however, might not be the best strategy for investors, as historical data suggests that investing on days when the S&P 500 hits a record high tends to yield better returns.
Goldman Sachs analysts support this notion, suggesting that investing in the S&P 500 on days when it reaches an all-time high historically outperforms investing on any given day [2]. To illustrate this, a chart comparing the average forward return in the S&P 500 when money is invested unconditionally on any given day and exclusively on days when the index reached a record high has been compiled by JPMorgan Chase [3].
The data reveals that over a 1-year period, the average forward return from investing on any given day is 12%, while from record highs, it is 13%. Over a 6-month period, both averages are identical at 6%. However, over a 2-year period, the average return from investing on record highs is 29%, compared to 25% from investing on any given day. Over a 3-year period, the difference is even more significant, with an average return of 46% from record highs compared to 40% from investing on any given day [3].
This trend continues over a 5-year period, with an average return of 81% from investing on record highs, compared to 75% from investing on any given day [3].
Studies further support this strategy. For instance, buying an S&P 500 index fund only on record-high days has outperformed buying on arbitrary days [1]. Additionally, when the index sustains momentum, such as closing above its 20-day moving average for extended periods, the average returns over the next year tend to be strong, commonly between 20% and 26% [3][5].
Despite concerns about buying at highs, historical evidence indicates that the market generally continues to advance after reaching new all-time highs, reinforcing the idea that investing at such peaks is not necessarily detrimental [2][5].
However, it's important to note that while this strategy has shown historical success, it does not guarantee future results. The economy is constantly evolving, and factors such as President Donald Trump's tariffs could introduce downside risk.
In conclusion, while investing on any given day might produce average market returns, historical performance favours investments made on days of record highs over random days. This counterintuitive strategy, which takes advantage of positive market momentum, could offer a unique opportunity for investors seeking to maximise their returns.
[1] Source: CNBC [2] Source: Bloomberg [3] Source: JPMorgan Chase [4] Source: Yahoo Finance [5] Source: Investopedia
- Investing in the S&P 500 on days when it reaches a record high historically outperforms investing on any given day, according to a comparison of average forward returns by JPMorgan Chase.
- A strategy of buying an S&P 500 index fund only on record-high days has been shown to outperform buying on arbitrary days, as suggested by various studies.
- While there is no guarantee of future results, historically, investments made on days of record highs tend to offer higher returns compared to investing on any given day, which could provide a unique opportunity for those seeking to maximize their finance through the stock-market.
