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Why it’s Okay to Invest Even at a Market High

I had recently chanced upon an interesting piece of research done by Jeff Demaso, the research director for “The Independent Adviser for Vanguard Investors.” In the study titled “Buy High!Demaso wanted to see how American investors would have fared in the US share market if they had only invested at market peaks in each calendar year between 1983 and 2013.

Amazingly, the investor who dollar-cost-averaged at annual market peaks only performed slightly poorer than another investor who simply invested at the end of each year; the first investor would have gotten annualised returns of 9.5% while the second investor had earned 9.9%.

This was a really interesting finding for me as I’ve had anecdotal experience with individuals who were afraid to start investing in recent times because the market just seems too high for them. I thought it was a real pity that they weren’t putting their money to work as early as possible to take advantage of the magic of compound interest. So, I sought to discover for myself if a Singaporean investor could do well in our local market even by investing only at annual market peaks between 1988 (the earliest price records available) and 2013.

I used the historical price records of the Straits Times Index (SGX: ^STI) from Yahoo! Finance and assumed that an investor had invested S$1,000 at the market peak of each calendar year and then left the funds untouched.

The results were interesting. For a hypothetical S$1,000 per month year investment (or a total investment of S$26,000), the investor would have ended up with S$39,068 today at the Straits Times Index’s current level of 3,295 points. After taking into account the timing of the annual cash flows, the investor’s annualised returns come in at 2.9%. Bear in mind that the gains from reinvested dividends have not been factored in; if they had, the investor’s returns would likely have increased by 2% to 3% per year.

Now, an annualised capital gain of 2.9% over 25 years isn’t exactly a fantastic achievement – I recognise that. But, that’s better than salting your money regularly into savings deposits and earn next to nothing.

In any case, my brief study of the Straits Times Index’s history is also a homage of sorts to the efficacy of dollar-cost-averaging – even when investing at the peak of each calendar year, the investor still came away with positive returns.

I also dug through the data again to see what kind of returns an investor could have gotten in the Straits Times Index if he had simply invested in it at the end of each calendar year. Turns out, he’d have earned 4.0% per year in capital gains. That’s higher as compared to the investor who invested only at market peaks, but, the difference really wasn’t as big as I had imagined before I worked my spreadsheets.

Of course, history is not a perfect predictor of the future. But, the next time you’re fretting about investing near a market high, know that the odds of turning in a positive return are actually in your favour. Besides, it will be incredibly tough (and really unfortunate) if an investor only managed to invest at the peak of each calendar year. Disciplined investing at regular intervals will also likely allow the investor to make purchases during times when the share market is cheap, thus giving a boost to his returns.

Ultimately, with investing in the share market, it’s time in the market that counts, not timing the market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.