Investors are getting a boost as stock markets hit record highs but what does this mean for new money going into shares and funds?
Shares have rallied since the start of the year and the S&P 500 hit a record level last week, helped by the continuing popularity of technology stocks, while the FTSE 100 has hit a three-week high.
That’s good news for investors with large exposure to these indices but it raises the question of if it is worth investing more while prices are so high.
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“It’s basic investing logic that buying high leaves less room for returns in the future,” says Ed Monk, associate director at Fidelity International.
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“Some might even be tempted to pause their investing until a more attractive entry point comes along.”
But he warns that there are disadvantages to sitting on the sidelines. Here is what to consider about investing in shares when markets are at record highs.
Why are shares hitting a record high?
Financial markets – particularly the S&P 500 - have rallied in recent months amid hopes of interest rate cuts.
While these hopes have been pushed back slightly, major technology stocks such as Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA and Tesla – known as the magnificent 7 - have continued to perform well.
This has helped push the S&P 500 to a record high in recent days. The FTSE 100 has also been boosted by the rising oil price amid Middle East tensions.
“Historically, when market indices are soaring, private investors tend to be lured back into the markets as sentiment improves and ‘FOMO’ – fear of missing out – takes hold,” says Jason Hollands, managing director of Evelyn Partners.
Is now a good time to invest?
It may seem pricey to put more money into the markets when prices are high.
There is a risk that you invest right at the top, just as prices fall.
Alternatively, they could rise further.
Analysis by Fidelity of the S&P 500’s performance going back to the 1970s shows that the annualised five-year return of the index dips from 11.2% to 9.7% when investing after it has hit an all-time high.
Monk highlights that this is lower but remains a healthy return.
The trouble is that no-one has a crystal ball so it is impossible to predict if share prices will continue to rise or if growth will slow or drop.
“Barely 12 months ago, many professional investment strategists were predicting 2023 would be a year of negative returns for the S&P, that the US would experience a recession and China would rebound sharply,” adds Hollands.
“All of those things did not happen.”
Hollands adds that the S&P 500 is “heavily distorted” by technology valuations.
“Investors need to look beyond the headline index and carefully consider which parts of the market to invest in, focusing on high quality companies with strong returns on capital, but wary of extreme valuations,” he says.
“We think the S&P 500 had make progress from here as economic clouds are lifting, rate cuts are on their way and there are signs that the narrow, AI-led rally of last year is broadening out to other sectors as confidence returns.”
Paul Denley, chief executive of Oakham Wealth Management, says it is also important to consider your choice of index.
“By investing in the S&P 500 you are taking quite a large bet that the bull run in technology will continue,” he says.
“The S&P 500 is also the most expensive benchmark in the world, so perhaps it’s worth considering the MSCI World Index which invests in 23 developed markets.
“The World Index, excluding the US, trades on a 19% discount to the S&P 500 on forward earnings, with the FTSE 100 on a staggering 45% discount.”
The power of regular investing
One way to overcome the peaks and troughs of the market is to taken a disciplined approach to investing, funnelling cash in on a regular timescale – such as monthly or quarterly, adds Hollands.
He says this removes the emotional aspect of worrying about timing which can often mean missing out on returns.
Time in the market rather than timing is most important.
“Psychologically, it can help to phase a large lump sum into the market over a period of time, which takes away some of the risk of investing the lump sum only to see markets drop shortly after,” says Ross Lacey, director of Fairview Financial Management.
“However, the stats show that it's more likely to be better to get it into the market as soon as possible.
“It should always go back to what makes most sense within the context of a financial plan. When will the money be needed, what's the reason for investing in the first place.”
