FT Opinion Skin in the Game
Should you ever buy a stock index at a record high?
It feels so wrong, but investors (me included) needn’t worry so much
by Stuart Kirk (3 hours ago)
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Thankfully, RBC Global Asset Management has crunched the data so I didn’t have to catch a train to the office to use Bloomberg. Over any five-year period since 1950, the numbers show, “buy at the top” returns only trail the returns from indiscriminate buying by one percentage point.
More amazing is how infrequently US share prices collapsed after reaching one of those 1,250-odd peaks. Five years on, for example, investors who bought at any top were never down more than 10 per cent on average. One year on, the probability of losing a tenth of your money was just 9 per cent.
In other words, don’t fear the highs. Share prices soon recover. Indeed a huge chunk of all global equity returns come from rebound days — as I’ve written previously — which tend to closely follow sell-offs. Miss these by trying to be clever and you’re screwed.
But professional investors are paid to be clever. On Monday, a version of the Vix index which measures implied volatility using options that expire in nine days, rose above the version that references 30-day options. This is very rare because usually more time passing equals more risk.
Clearly some investors reckon November 5 will be a total hit show, as they say. By that logic, though, I should also ditch my other equity ETFs ahead of the US vote, as they would invariably follow the S&P 500 south.
Indeed, I recently mulled being 100 per cent invested in cash for a week or two just in case. If the UK Budget or presidential election or whatever in the Middle East turned out better than expected, I could buy back in with limited opportunity cost.
Why didn’t I? A chaotic US poll has been pondered for so long that surely some madness is already in the price. And one of the main reasons I only own equity markets that are unequivocally cheap is because they are more defensive.
That means while I have less fun when riskier assets are partying like mad, the likes of Japan, Asia and the UK should fare better if Washington voms. The analysis above, however, suggests I should buy US shares regardless.
The RBC data can be accessed here:
https://www.rbcgam.com/en/ca/learn-plan/inv...me-highs/detail 
Aug 31 2024, 02:09 PM
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