Stocktake: Stocks may not dip for cautious investors

Buying all-time highs can be scary but the reality is new highs are normal

Global stocks are at all-time highs, having gained more than 60 per cent since March’s bottom. If you missed out on the rally, should you wait for stocks to dip?

Buying all-time highs can be scary but the reality is new highs are entirely normal. Data from Ritholtz Wealth Management's Ben Carlson, for example, show that, historically, stocks have been within 5 per cent of all-time highs roughly 40 per cent of the time. Average one-, three- and five-year returns following all-time highs are right around long-term norms, with annualised gains of about 9 to 10 per cent.

Does it make sense to wait when stocks seem expensive, like now? Sometimes. Historically, if you bought when markets were expensive, indices would have fallen 10 per cent below your entry price at some stage over the next three years in 56 per cent of cases, according to a 2017 Elm Partners study.

The problem is that in the 44 per cent of cases where no correction occurred, stocks went on to gain by about 30 per cent.

Buying at all-time highs might seem risky but waiting for a correction can be a very costly and painful affair.